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Saturday, October 16, 2010

Flat COLA: No Social Security Cost of Living Adjustment for 2011

There will be no fizz in Social Security checks for the new year.  The Social Security Administration announced "There will be no increase in Social Security benefits payable in January 2011, nor will there be an increase in SSI payments."
COLA Computation
  • The last year in which a COLA became effective was 2008. Therefore the law requires that we use the average CPI-W for the third quarter of 2008 as the base from which we measure the increase (if any) in the average CPI-W. The base average is 215.495, as shown in the table below.
  • Also shown in the table below, the average CPI-W for the third quarter of 2010 is 214.136. Because there is no increase in the CPI-W from the third quarter of 2008 through the third quarter of 2010, there is no COLA for December 2010.

CPI-W for—
2008 2010
July 216.304 213.898
August 215.247 214.205
September 214.935 214.306
Third quarter total 646.486 642.409
Average (rounded to the nearest 0.001) 215.495 214.136
Remember that the price of oil peaked during the three months in 2008 when the COLA for 2009 was set at 5.8%. 
Chart showing oil prices vs the S&P500.
click image to see a larger version

With oil prices the past three months about half their peak value, CPI is slowly catching up but still below the 2008 calculation. The good news for seniors is they benefited from a higher SS payment than they would have received if the 2009 COLA was set a few months later after the price of oil crashed to $35 at the end of 2008.

Since this blow-up of CPI in 2008 due to high oil prices, I've reported CPI by month in my newsletter in a table so you can see what to expect. CPI peaked in July 2008 at 219.964. I show this value in Red. This September the CPI recovered to 218.439, still slightly below its 2008 peak. CPI for 2008 was only up 0.1% but Social Security beneficiaries got a 5.8% adjustment because of the spike in oil prices. They were very, very lucky to get a 5.8% raise while the rest of the country got fewer hours or lost jobs during the recession.
This table Automatic Social Security Cost-Of-Living Adjustments by Year clearly shows the January 2009 adjustment of 5.8% was the largest since July 1982!
Since actual CPI was effectively lower than what Social Security recipients were getting paid for, taxpayers were very generous to retired people at a very good time... during this recession. My guess is the CPI will make a new high in the next few months and COLAs will show up again next year for 2012.

Table of Social Security COLAs by Year

Current Oil Prices and New Graph
Click for a chart and current quote for crude oil prices.

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