Cost-of-Living Adjustments

As noted, the law provides that Social Security and SSI benefits will increase automatically to reflect the annual increase in the CPI-W. The average CPI-W for the third calendar quarter of the prior year is compared to the average CPI-W for the third calendar quarter of the current year, and the resulting percentage increase represents the percentage that will be used to adjust Social Security benefits beginning for December of the current year.  SSI benefits are adjusted by the same percentage the following month (January).

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History

The COLA provision was enacted by Congress as part of the 1972 Social Security Amendments. Prior to enactment, increases in Social Security benefits had to be enacted by Congress on an ad hoc basis. At that time, inflation was relatively high, so the provision enacted in 1972 provided for an automatic COLA only if the increase in the CPI-W was at least 3 percent, the so-called “3-percent trigger.”   

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Annual COLA

Under present law, there will be a COLA for Social Security and SSI benefits provided that there is an increase in the average of the CPI-W from the third calendar quarter of the prior year to the third calendar quarter of the current year of at least one-tenth of one percent (0.1 percent). If the CPI-W increases by less than 0.05 percent, or if the CPI-W decreases, there will not be a COLA. If there is no COLA, Social Security and SSI benefits will remain the same.

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Other Automatic Increases

There are a number of other automatic increases in the Social Security program. Two of these increases are based upon increases in the national average wage index, but are triggered only if there is a COLA for Social Security benefits. These increases are:

The contribution and benefit base—the cap on the amount of wages and self-employment income subject to Social Security payroll tax; and

Retirement Earnings Test exempt amounts—caps on the amount of earnings that a beneficiary can earn before a reduction in benefits will apply.

Since there is no COLA in 2010, the contribution and benefit base and the Retirement Earnings Test exempt amounts will not increase, even though average wages did increase.

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Effect on Medicare Part B Premium

Unlike the Social Security COLA, the CPI-W plays no part in the computation of the Medicare Part B premium. The Medicare Part B premium is increased each year, if necessary, so that the Part B premium is sufficient to fund approximately 25 percent of the projected cost of the Part B program. Any such premium increase is effective in the same month that the Social Security COLA is payable.

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