Social Security & Medicare Q&A:Do We Get the Full Amount of the CPI?

Q: Is the annual Social Security COLA based 100% on the CPI?  Or is it indexed to the CPI and a percentage, determined by Congress, subtracted?  If I wanted to determine what the next COLA would be at today's point in time, how would I compute it? — W.G.

A: The Social Security Cost-of-Living Adjustment (COLA) is calculated using 100% of the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W).  There are no points subtracted that reduce the COLA.  There have been legislative proposals in the recent past that would do this, or, tie the COLA to a completely different, and more slowly growing index, but they have not yet become law. 

In the 1990’s, under pressure to balance the budget, Congress considered legislation that would have reduced COLAs.  Rather than face the political fall-out, Congress relied instead on the Bureau of Labor Statistics to change how the CPI is calculated.  Virtually all the changes tend to cut the rate of growth in the CPI. Since 1997 the cumulative effect of these changes is that the CPI is growing about one percentage point more slowly than the CPI in 1996.  The COLA payable in 2003 was just 1.4%.  If calculated using pre-1997 methods, it likely would have been about 2.4%.  In other words, I estimate those technical changes effectively cut your COLA about 48%.

Unless one has the specific Bureau of Labor Statistics CPI-W economic data needed for making the COLA calculations, I find estimating COLAs a fine art—similar to what you might find on a telephone psychic hotline.  The Social Security Administration averages data from July, August, and September and averages the data from the same months of the previous year.  The averages are then subtracted and multiplied by 100 to get a percentage. 

Throughout the year I monitor the increase in the CPI-W monthly.  You can get this information from the business and economic news media or by checking the web site of the Bureau of Labor Statistics at http://www.bls.gov.  Look for the 12-month increase in the CPI-W to get a rough idea of how we are doing to date. The final data to calculate the COLA is released in mid-October.  The Social Security Administration then does your work for you and announces the COLA the same day.

Readers interested in getting the latest year-to-date CPI-W data and COLA estimates may do so by calling TSCL’s Washington Weekly Hotline at 800-333-8725 or visiting TSCL web site at http://www.tscl.org/NewContent/102025.asp.

November 2003

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