Social Security Report

Q & A

What is the 2015 COLA and how is it determined?

Complete Question: What is the Social Security Cost of Living Increase for 2015 and how does the government decide how much it should be because it does not seem to be in line with inflation.

Answer: For 2015, COLA (Cost of Living Adjustment) to Social Security payments will be 1.7%, compared to 1.5% in 2014. The government uses COLA adjustments to account for increases in costs of living due to inflation. Many people do not understand this because they believe inflation is higher than 1.5% or 1.7%. COLA is calculated by using the CPI-W (Consumer Price Index for Urban Wage Earners and Clerical Workers). The Bureau of Labor Statistics (BLS) determines and publishes the CPI-W on a monthly basis. The government looks at the average CPI-W for the third quarter of the last year in which there was a COLA (in this case the third quarter of 2013) and then the average CPI-W for the third quarter of the current year (2014) and calculates the percentage increase. This percentage increase in CPI-W is the COLA.

For example, when calculating the 2014 COLA increase, Social Security looked at the average CPI-W of the last year a COLA went into effect (2012, which was 226.936). The average CPI-W for the third quarter of 2013 was 230.327. This makes the percent increase from 2012 to 2013 1.5% (230.327 – 226.936)/226.936 x 100. Note that the calculation is rounded to the nearest one-tenth of a percent when determining the COLA amount.

So why does this appear to not accurately reflect inflation? First of all, inflation measures the value of a dollar. For instance, if the cost of ABC brand coffee, same size, same location, increased by 5% from one year to the next, that would be a measure of inflation. However, CPI-W would say that because of the increase in cost of ABC brand coffee, you as a consumer would switch to a cheaper brand and/or a cheaper location, thus making the increase in cost only 1.5%. This is described as a “change in buying pattern” by the consumer, rather than true inflation of the dollar. Another example would be measuring the change in buying habits for steak. Instead of looking at inflation for the cost increase of Filet Mignon, CPI-W would say that consumers would switch to T-Bone. Therefore, instead of looking at the true price increase of Filet from one year to the next, it looks at the cost of switching from Filet to T-Bone. There are many other consumer price indices, but the government is currently using the CPI-W to determine COLA increases. Other proposed CPI’s for Social Security include the CPI-E (Consumer Price Index for the Elderly, which puts a heavier weight on items such as healthcare and is estimated to increase COLA adjustments) and Chained CPI (which indicates consumers would switch from Filet Mignon to Chicken – something even cheaper than another steak product – and is estimated to decrease COLA adjustments). However, CPI-W is still currently in use. For more information on the many different CPIs determined by The Bureau of Labor Statistics, you can learn more at the their website: www.bls.gov.

Notice: For any additional questions about the CPI or COLA, or for any Social Security questions, you can reply below. If you would like to discuss your situation in private, you can email C.J. Miles at cmiles@amacfoundation.com. Please do not send any personal identification information such as Social Security numbers.