Q & A
The 2015 COLA of 1.7% seems so low…has it always been this way?
Complete Question: I started Social Security in 2014 and got the 1.7% COLA increase for 2015. I don’t understand how that amount is keeping up with inflation. Is this what I should expect in the future? Has it always been this low?
Answer: You are certainly not the only one to be frustrated with this low increase. I should explain that it does not reflect inflation. Inflation is defined as the rate at which the dollar is losing it’s value. Or in other words, the change in the purchasing power of the dollar. COLA is based on changes in the prices of a market basket of goods and services as measured by the CPI-W. The CPI-W also weights categories of goods and services. For example, a price change in one product may have a larger effect than a price change in another product. That is why it is not necessarily equal to inflation, which is a more direct measure. (If you are wondering, Kiplinger is forecasting the 2015 inflation rate to be 3%).
To answer your other question, no, it has not always been this low, but it has also been lower. There was a time when it required an act of legislation to increase benefit payments. Since Social Security was signed into law in 1935, the first increase did not occur until 1950; therefore, it was 77% (although I would not expect that to ever happen again). Starting in 1975, COLA became an automatic increase in benefit payments based on changes in the CPI-W. The CPI-W is the Consumer Price Index for Urban Wage Earners and Clerical Workers and is determined and published by the Bureau of Labor Statistics. The calculation determines the percent change from the third quarter of one year to the third quarter of the next year. This means that the CPI-W increased 1.7% from the third quarter of 2013 to the third quarter of 2014.
Automatic COLA increases since then have ranged anywhere from 0% (which occurred only a few years ago in 2010 and 2011) to as high as 14.3%, which occurred in 1980. Although I imagine you are more interested in recent increases. Aside from the two years of 0% changes, the 2014 1.5% increase was the lowest since 2003 (1.4%). In 2012 there was a 3.6% increase; 2009 was 5.8%; 2008 was 2.3%; and 2007 was 3.3%. Again, these are based on CPI-W calculations and not random increases chosen by the government. There are proposals to change the calculation used to determine COLA, such as CPI-E (Consumer Price Index for the Elderly, which is expected to make COLA larger) and Chained CPI (which is expected to make COLA smaller), but the CPI-W is the current law on how it is determined.