No Social Security Cost Of Living Allowance (COLA) In 2011 – Why?

For the most current information on the latest Department of Labor CPI-W release and its potential effect on Social Security and SSI COLAs, please follow this link to see my most recent post on this topic. Thank you.

Yesterday, October 15th, the Social Security Administration (SSA) issued its long expected news release telling the country that for the second year in a row there will be no cost of living allowance (COLA). SSA has paid a COLA every year (except 1983 — see below) since automatic COLAs began in 1975 until 2009. In 2010 there was no COLA. Now, with no COLA for 2011, that is two years in a row. There may be a COLA in January 2012, but we really won’t begin to have any idea until August 2011, when we see what the cost of living is in July.

Read this only if you are really interested. From 1975 through 1982, COLAs were paid beginning in July, the first month of the government’s fiscal year. In 1982, the government changed its fiscal year from July through June to October through September. Fiscal year 1983 ran from July 1982 through September 1983. A COLA was paid in July, 1982.

In 1983, Congress passed P.L. 98-23 (“The 1983 Amendments”) and President Reagan signed it into law. One of the cuts to Social Security benefits out of these amendments was a permanent delay in payment of the COLA from the first month of the fiscal year to the fourth month. The COLA for fiscal year 1984, which began in October 1983, was paid in January 1984.

Here is part of the news release.

SOCIAL SECURITY
News Release
Under the Law No Social Security COLA for 2011

Monthly Social Security and Supplemental Security Income (SSI) benefits for more than 58 million Americans will not automatically increase in 2011, the Social Security Administration announced today.

The Social Security Act provides for an automatic increase in Social Security and SSI benefits if there is an increase in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) from the third quarter of the last year a cost-of-living adjustment (COLA) was determined to the third quarter of the current year. As determined by the Bureau of Labor Statistics, there is no increase in the CPI-W from the third quarter of 2008, the last year a COLA was determined, to the third quarter of 2010, therefore, under existing law, there can be no COLA in 2011.

Quoted from Under the Law No Social Security COLA for 2011 dated October 15, 2010.

Let’s put this into normal English. The Department of Labor, Bureau of Labor Statistics (BLS) puts out a report on or around the 15th of each month detailing how much the cost of living increased or decreased the preceding month. One part of this report refers to the CPI-W, the Consumer Price Index for Urban Wage Earners and Clerical Workers. More on how this is determined later in this post.

SSA looks at the CPI-W reports for July, August, and September (the last quarter of the fiscal year), and averages them. It then compares the average for the current year to the average of the same three months in the most recent previous year which generated a COLA.

Determining The 2009 COLA

2007 Average CPI-W: 203.596

Jul ’08 216.304 Aug ’08 215.247 Sep ’08 214.935

2008 Average CPI-W: 215.495. This is 5.8% increase from 2007’s average CPI-W, so a COLA of 5.8% was paid in January 2009

Determining The 2010 COLA

2008 Average CPI-W: 215.495

Jul ’09 210.526 Aug ’09 211.156 Sep ’09 211.322

2009 Average CPI-W: 211.000. This is a 2.0% decrease from 2008, but, by law, SSA benefits cannot be decreased. No COLA was paid in January 2010. Since no COLA was paid based on the 2009 average CPI-W, the baseline for 2011 will remain the 2008 average CPI-W.

Determining The 2011 COLA

2008 Average CPI-W: 215.495

Jul ’10 213.898 Aug ’10 214.205 Sep ’10 214.306

2010 Average CPI-W: 214.136. This is an increase from the 2009 CPI-W, but still less than the baseline 2008 CPI-W. No COLA was paid in 2011.

In case you are wondering what this strange looking number actually means, it represents the cost of goods and services in a particular month. The baseline for the CPI-W is 1983. The CPI-W was set at 100.000 that year. This means that $100 worth of goods and services purchased in 1983 would cost $214.31 in September 2010.

So what is CPI-W, anyway?

The following information comes from the BLS web page entitled ‘CPI FAQs.’

BLS measures the CPI and generates reports for three population groups. Two of them are:

1. All Urban Consumers (CPI-U)

2. Urban Wage and Clerical Workers (CPI-W)

The CPI-U measures consumer price inflation for all U.S. residents of urban areas, which accounts for about 87 percent of the U.S. population.

The CPI-W measures consumer price inflation for a subset of the CPI-U population: residents of urban areas who live in households that:

a. receive more than half of their income from clerical or wage occupations, and

b. have one [member of the household] employed for at least 37 weeks during the previous 12 months.

The CPI-W covers about 32 percent of the U.S. population.

The CPI-U is the most commonly used index because it has the broadest population coverage. However, the CPI-W is the index most commonly used to make cost-of-living adjustments for labor contracts [and government agencies — my addition.]

The BLS reports a third index as well, the Chained CPI-W. More on that later.

Most Social Security beneficiaries aren’t working, at least not substantially. They don’t fall within the CPI-W population. The CPI-U population is a little closer, as it includes people who aren’t working. If SSA had used CPI-U data rather than CPI-W, they would still not have paid a COLA in 2010 or 2011, but it would have been closer.

This quotation combines information from the BLS CPI FAQ page and the BLS press release for August 2010. I wrote this part before the September press release was released.

The CPI represents all goods and services purchased for consumption by the reference population (U or W). BLS has classified all expenditure items into more than 200 categories, arranged into eight major groups. Each item is weighted to show what percentage out of 100% is spent within these groups and categories.”

Major groups and examples of categories in each are as follows:

Food And Beverages (breakfast cereal, milk, coffee, chicken, wine, full service meals, snacks). 16.4% of total.

Food 15.3%
Food at home 8.9%
Food away from home 6.4%
Alcoholic beverages 1.1%

Housing (rent of primary residence, owners’ equivalent rent, fuel oil, bedroom furniture). 39.8% of total.

Shelter 30.2%
Fuels And Utilities 5.6%
Household Energy 4.5%
Fuel Oil And Other Fuels 0.3%
Gas (Piped) And Electricity 4.2%
Water, Sewer, & Trash Collection 1.1%
Household Furnishings And Operations 4.0%

Apparel (men’s shirts and sweaters, women’s dresses, jewelry, footwear). 3.8% of total.

Transportation (new vehicles, airline fares, gasoline, motor vehicle insurance). 18.6% of total.

Private Transportation 17.9%
New And Used Motor Vehicles 7.0%
Motor Fuel 5.8%
Gasoline 5.5%
Motor Vehicle Parts & Equipment 0.5%
Motor Vehicle Maintenance & Repair 1.2%
Public Transportation 0.8%

Medical Care (prescription drugs and medical supplies, physicians’ services, eyeglasses and eye care, hospital services). 5.3% of total.

Medical Care Commodities 1.3%
Medical Care Services 4.0%
Professional Services 2.2%
Hospital And Related Services 1.3%

Recreation (televisions, toys, pets and pet products, sports equipment, admissions). 6.0% of total.

Education and Communication (college tuition, postage, telephone services, computer software and accessories). 6.2% of total.

Education 2.3%
Communication 3.8%

Other Goods And Services (tobacco and smoking products, haircuts and other personal services, funeral expenses). 4.9% of total.

Tobacco And Smoking Products 1.4%
Personal Care Products And Services 2.5%
Miscellaneous Personal Services 1.0%

For a really detailed explanation of how the BLS compiles and analyzes cost of living data, see their current press release Consumer Price Index Summary. This link does not change, but the BLS attaches a new report to it each month.

As Benjamin Disraeli once famously said, “There are lies, damned lies, and statistics.” The statistics provided by BLS, just for its monthly CPI report, comes with seven tables jam-packed with numbers. I am not a statistician. I suspect not many people are. I have no idea whether their methods are valid, and I have no way to tell if anything was “fixed.” There are two areas where it seems possible for a little “adjustment” to occur. First is the weights assigned to the various expenses. They don’t seem all that close to my expenses, not that I have any way to know whether my expenses are typical or not. The other area is that they apply a seasonal adjustment to the changes in cost in the various CPI categories. Some of these seem reasonable; for example, people probably do pay less than average for heating fuel and more than average for recreation during the summer months.

As I mentioned above, there is a third CPI index on the monthly CPI summary reports. It is called the Chained CPI-U, or C-CPI-U, for short. This index applies to the same target population as the CPI-U, all urban dwellers, about 87% of the population. The same raw data are used, but a different formula is employed to calculate average prices. The chained CPI was developed to overcome a shortcoming of the CPI-U, which does not account for the changes that people make in the composition of goods that they purchase over time, often in response to price changes. The C-CPI-U is intended to capture consumers’ behavior as they respond to relative price changes, referred to as the “substitution effect.” For example, a 6 ounce can of Hunt’s Tomato Paste costs $1.09 at my local supermarket. Their house brand, same size, costs $0.60.   An 18 ounce box of Kellogg’s Corn Flakes costs $4.69.  Their house brand, same size, costs $3.29.  When a name brand increases the price of its product, the consumer shifts to a non-name brand with a lower price, which the C-CPI-U interprets as no inflation.

BLS generates a fourth CPI index on an experimental basis, called CPI-E, which collects data on changes in costs incurred by the elderly (over age 65.) This information is not included with the monthly CPI Summary reports. The CPI-E would probably provide more useful data for SSA to use in COLA determinations, and a bill to authorize this has been introduced in congress several times, but has always been defeated. The main objection is that not everyone receiving Social Security is elderly. Nevertheless, the spending by us younger people who are disabled and living on fixed incomes probably more closely resembles that of the elderly rather than urban wage earners.

The Detroit Free Press reported a couple of days ago that the House Democrats are going to introduce a bill during the lame duck session which would pay a one time payment of $250.00 to all Social Security beneficiaries. They also reported that there was likely to be Republican opposition to this in the Senate. But they did the same exact thing to “replace” the nonexistent 2010 COLA and the Republicans were just as intransigent, so who knows.

(Updated February 21, 2011: It never happened.)

Since no COLA is being paid, Medicare Part B premiums will stay the same for most beneficiaries (about 75%) under what is called the “hold harmless” provision. This means that the Part B premium cannot increase by more than the COLA amount. No COLA means no Part B increase. This provision applies to all beneficiaries except those who have high total income (5%), those whose Part B premium is paid by their state’s Medicaid program (17%), and those who will become eligible for Part B for the first time in 2011 (3%).

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