Monthly Archives: February 2012

Demystifying the COLA

The amount of the annual cost of living adjustment, or COLA, applied to Social Security benefits is probably the most-awaited announcement that the Social Security Administration has the pleasure to make each year.While the COLA has a considerable impact on millions of  SS beneficiaries across the country, the mechanics of the (mostly) regular raise are little understood. I’ve heard some suggest that the COLAs are set each year by Congress, and this was indeed the case until 1975. However, starting in 1975, COLAs have been automatic and based solely on a consumer price index.

Today, SS COLAs are based on the CPI-W. The CPI-W is a price index published by the Bureau of Labor Statistics (BLS, a government agency separate from the SSA) and is intended to represent the prices faced by “urban wage earners and clerical workers.” The BLS tabulates the CPI-W by directly collecting price data from around the country on items in specified “market baskets.” The BLS uses consumer survey data to determine the contents of the market basket, but it’s meant to mirror expenditures felt by “urban wage earners and clerical workers.” It’s worth pointing out that the CPI-W does include food and energy expenditures. Some price indices exclude these items due to their volatility, but the CPI-W, and therefore SS COLAs, do respond to fluctuations in food and energy prices.

The SS COLA is based on the average CPI-W in the third calendar quarter. So, each year in October, the CPI-W from July, August, and September are averaged and compared to the same measure from the year of the most recent COLA. Normally this the 3rd quarter average is compared to that of the previous year, but if there was no COLA in the previous year, then the comparison is made to the most recent year in which there was a COLA. If the 3rd quarter average in the present year has increased by at least 0.1% relative to the 3rd quarter average in the year of the last COLA, then, in December, SS benefits increase by a percentage equal to the difference in the two COLAs. If the 3rd quarter average increases by less than 0.1% or decreases, SS benefits stay the same. SS benefits never fall due to a decline in the CPI-W, there are no negative COLAs.


CPI-W and SS COLA: 2006-2011


Average 3rd quarter CPI-W and SS COLAs in recent years are shown in the chart above. During the recent recession, CPI-W actually fell, but SS benefits remained the same between December 2008 and December 2011. Since there were no COLAs in 2009 or 2010, the 3rd quarter average CPI-W in 2011 was compared to that of 2008, and an increase of 3.6% led to a COLA last December. Looking ahead to the next COLA measurement, the CPI-W has stayed almost exactly the same since the 3rd quarter of 2011. Although there has been no increase in CPI-W as of yet, the possibility of another COLA in December of 2012 is far from being ruled out. Stay tuned to this blog for updates on CPI-W and a potential COLA in 2012.

Special Treatment for Spouses?

We talk at length on our website about the strategies available to married persons, and it is implied that those strategies are not available to single persons. There are literally thousands of distinct paths that married persons can take with respect to their Social Security retirement benefits, whereas single persons have only one choice to make – when should I claim these benefits?

We do not, however, attempt to quantify the advantages that these strategies bestow on a married couple relative to a pair of single individuals. This topic is interesting in a general sense, but I was inspired to take a closer look at it after reading an article by Richard Thaler, an economist at the University of Chicago, that appeared in The New York Times on February 18. In his article, Dr. Thaler discusses the financial implications of the ongoing same-sex marriage debate. I will leave the debate over same-sex marriage for another blog, but seeing as Dr. Thaler alluded to “spouses get[ting] special treatment from Social Security,” this article is right up our alley.

The application to the same-sex marriage debate is clear – the Social Security Administration does not recognize same-sex marriages. Therefore, although a couple may be legally married in their state, they are treated as two single people with respect to Social Security. This designation denies them spousal benefits and survivor’s benefits, and precludes them from using the strategies available to married persons.

To examine the financial impact of being considered single rather than married, I used our custom Social Security reports and considered the two individuals in the table below.

Person Birth Year Full Retirement Age (FRA) Benefit Life Expectancy
A 1948 $2,250 82
B 1952 $800 82

First, I ran these two individuals through our married persons calculator and found that by utilizing the “free spousal benefit” strategy, these individuals could claim a total of $550,000 in what we at call Social Security Wealth.

Next, I ran the same two individuals though our single persons calculator separately. By filing for retirement benefits at the optimal age given their life expectancies (82 is the median life expectancy for males), these two individuals could claim a total of $443,000 in Social Security Wealth. So, relative to being single, these two individuals would get an extra $107,000 in Social Security Wealth, almost a 25 percent increase, as a married couple. Obviously, the “married advantage” can be larger or smaller based on the individuals in question, but this case study makes clear that the advantages to being married in the eyes of Social Security can be quite significant.

Welcome to our Blog!

Thanks for reading the Social Security Choices blog! It’s certainly worth asking why we have a blog in the first place. We are a company that provides reports to clients hoping to maximize the amount they receive from Social Security. In addition to that, we already have a considerable amount of informational material pertaining to Social Security on our website, so what on earth are we going to talk about in a blog?

Well, we see our blog as more dynamic outlet for information. Some of the topics we’ll cover will be directly related to Social Security claiming decisions, while others will be tangentially related (dealing with related issues facing retirees and those nearing retirement). We may at times discuss news stories about Social Security, both minor stories, like the return of mailed SS Statements, and major stories, like proposals floated to revamp the SS system.

Unlike the information presented on our website, some blog posts may toe the line between fact and opinion, as a blog is wont to do, and others may cross it altogether.  We will do our best to make a clear distinction. We welcome you to share your opinions and highlight new facts in the comment section. Questions about Social Security are always welcome (and even about other topics that we discuss here, or that you’d like us to discuss).

Thanks again for checking out our blog. Please come back often!