Why CBO Projects No Social Security COLA for 2010 to 2012 Under Current Law

April 22, 2009

The Social Security Administration (SSA) generally adjusts benefits payable each January based on the annual change in the consumer price index for urban wage earners (CPI-W) through the third quarter of the previous calendar year. (More information about the CPI is available from the Bureau of Labor Statistics <http://www.bls.gov/cpi/cpifaq.htm>.) The index is based on a starting point of 100 for the 1982-1984 period. In January 2009, Social Security beneficiaries received a benefit increase (often referred to as a cost-of-living adjustment or COLA) of 5.8 percent. That COLA reflected the increase in the CPI-W from 203.4 in the third quarter of 2007 to 215.2 in the third quarter of 2008 (215.2 divided by 203.4 equals 1.058, or a 5.8 percent change for that year-over-year comparison).

From the third quarter of 2008 to the first quarter of 2009, the CPI-W has fallen (by about 4 percent) to 206.5 largely reflecting the decline in energy prices from their historically high levels in 2008. Even though CBO anticipates that the CPI-W will rise a bit over the next several months, we project that it will be 209.5 for the third quarter of 2009, lower than the 215.2 CPI-W for the third quarter of 2008. By law, Social Security benefits are unchanged in years in which the change in CPI-W since the previous adjustment to benefits is zero or less than zero. Thus, CBO anticipates no COLA in January 2010.

Moreover, CBO projects that inflationary pressures will be very low over the next fewyears---in particular, our March 2009 economic forecast says that the CPI-W will not reach the level it attained in the third quarter of 2008 until late in 2011. (Under current laws and policies, CBO anticipates third-quarter-over-third-quarter increases in the CPI-W of 1.1 percent each year from 2010 to 2012.) As noted, a Social Security COLA will not be triggered until the CPI-W for the third quarter of a year exceeds its level in the third quarter of 2008. We project that the CPI-W will reach 217.0 in the third quarter of 2012, triggering a 0.8 percent COLA payable in January 2013. Thus, even though CBO is projecting price increases in fiscal years 2010 and 2011, those annual price increases would not be large enough to offset the price declines that have already taken place in recent months. Beneficiaries in other federal programs, including civil service and military retirement, and those drawing veterans compensation and pensions, also will not receive COLAs in 2010, 2011, or 2012, by CBOs projections, because their COLAs are tied to Social Securitys under current law.

The absence of COLAs will affect payments of Social Security taxes and the base for calculating benefits for new beneficiaries because it will affect the maximum amount of wages that are subject to Social Security, known as the taxable maximum. The Social Security Act specifies that the taxable maximum increases only in years in which a COLA occurs. Thus, under CBOs forecast, that maximum will be frozen until 2013. At that time, the contribution and benefit base will increases by the change in the national wage index since the last time a COLA was triggered. Following those current-law rules, CBO anticipates the base will hold steady at $106,800 for 2009 through 2012, and then jump to $118,200 in 2013, reflecting the cumulative change in the national wage index during the period of no COLAs.

In contrast, CBO projects that the initial benefits for newly eligible beneficiaries will continue to rise each year because those benefit calculations are linked to the annual growth in earnings and not tied to COLAs. Wage-indexing is applied to a persons earnings history, and the dollar values in the three-bracket benefit formula are adjusted by the annual percentage change in average earnings. (The adjustments to the national wage index are permitted to be negative if wages were to decline.)

Tomorrows blog will discuss the implications of the projected zero COLAs for the premiums charged to enrollees in Medicare Part B.