Q & A
Is it true that the 2016 COLA will be 0% or negative?
Complete Question: I keep hearing that we will have either no or negative COLA for 2016. Is that true or is it just media hype? Also, is it true that this is based on the low gas prices?
Answer: First of all, there will never be a negative COLA unless a new law is created. As of now, if there is a negative change in prices that would result in a negative COLA, you would experience a 0% increase in benefits.
In regards to what is happening for 2016, as of right now (October 14th) it has not yet been determined. COLA is based on the changes in CPI-W (Consumer Price Index for Urban Wage Earners and Clerical Workers) from the third quarter of one year until the third quarter of the next year. Therefore, the 2016 COLA cannot be determined until the Bureau of Labor Statistics (BLS) has calculated the CPI-W for the third quarter of 2015, which is the end of September. Even though it is now October, the data has to be collected and then seasonally adjusted.
One thing that is important to understand is that the BLS publishes a few different CPI numbers – CPI-U, CPI-W, and C-CPI-U. The CPI-U represents the majority of the population; however, the CPI-W is a subset of the CPI-U and is the measure used to determine COLA. The BLS recently began to publish the C-CPI-U (aka “Chained CPI”) because there have been proposals that include using this measure to determine COLA. Typically, COLA would be smaller if Chained CPI were used; however, some believe that it is a more accurate measure of consumer spending. As of now, it is not being used, it is only being measured.
To get back to your question – the media has been discussing COLA and CPI a great deal lately because of the threat of no COLA increase in 2016. In addition, the BLS has reported monthly increases and decreases. For example, the CPI-U decreased 0.1% in August. When reading about these changes in the media, it is important to consider a number of factors. For instance, the news releases such as the one I just mentioned are for CPI-U and therefore do not necessarily equal the change in CPI-W. In addition, the change is for one month only and therefore does not necessarily represent the outcome for an entire year. To illustrate this point, the CPI-U, although decreasing 0.1% in August, had increased 0.2% in the prior 12 months. Another factor to consider is whether or not the amount reported was seasonally adjusted. If the amount has not yet been seasonally adjusted, then it is not the final determined percentage that will be used.
As you mentioned, there has been a lot of talk about gasoline prices causing the CPI to decrease, which negatively impacts your COLA. It is true that gasoline has declined; however, there are 200 categories of items (goods and services) used to determine the CPI, so gasoline is only one aspect taken into consideration and is not the only item has declined in the past year. As per the BLS, other items that have declined include airline fares, apparel, used cars and trucks, and household furnishings and operations. It is also important to take into account that each item within the 200 categories carries a different weight when determining the overall CPI. For example, changes in all food categories accounts for 14% of the CPI. Gasoline, on the other hand, only accounts for 4.2% of the overall change in CPI.
This is probably more information than you were asking for, but I hope this helps clarify the situation even though we still do not know what the COLA will be for 2016 yet. What the recent reports have told us is that there is a likely chance of no COLA or a low COLA, but never a negative COLA.
NOTE: The Bureau of Labor Statistics has scheduled a news release this week that will provide the September 2015 CPI. Keep an eye out for an addendum to this Q&A for an update.
C.J. Miles, MBA, MSAHCM
Research Analyst & Social Security Advisor
AMAC Foundation