2012 COLA Watch (July Report – Updated Monthly)

Background: Under current law (*) Social Security determines whether there will be a COLA for the succeeding year and its amount in October each year by comparing the average CPI-W (Consumer Piece Index – Urban Wage Earners And Clerical Employees) for July through September of that same year to the average CPI-W for July through September of the last year which produced a COLA. I call this the “baseline .” This year, the baseline we are working from is the period from July through September, 2008, which generated a 5.8% COLA in 2009. The average CPI-W for July 2009 through September 2009 and the average CPI-W for July 2010 through September 2010 did not exceed the baseline (the 2008 average,) so there were no COLA’s in 2010 or 2011. This year it appears that the CPI-W for July through September will significantly exceed the baseline, so there will be an SSA COLA in 2012 and, if current trends continue, it is looking very good for a Social Security COLA in 2012 of at least 3%, and maybe more.

(*) There is a possibility, although I think it is unlikely, that the Congressional budget deficit negotiators and President Obama may change the method by which COLAs are calculated. There are no recent details about this.

The Baseline CPI-W Amounts

July 2008 CPI-W: 216.304

August 2008 CPI-W: 215.247

September 2008 CPI-W: 214.935

2008 Average CPI-W: 215.495. This is shown as the bottom red line on the graph below, and is the threshhold we must exceed to receive any sort of COLA in 2012..

Since then the CPI-W has been lower, until January, 2011. The months we are now concerned with are July through September, 2011. What happens before then shows a trend line and may be predictive. With this COLA Watch we come to the end of the predictive period. Next month’s report will show July CPI data, and will be used to determine the COLA.

The Current CPI-W

According to the Bureau of Labor Statistics (BLS), the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) decreased 0.2% in June 2011 to an index level of 222.522 (1982-84=100).

The Energy Index: The gasoline index declined sharply in June, falling 6.8 percent. While this decrease was the major factor in the seasonally adjusted
decline in the all items index, the index for household energy declined as well.

The Food Index: The food index increased, although the 0.2 percent rise was the smallest of the year. The index for food at home increased 0.1 percent, with major grocery store food groups mixed. The index for fruits and vegetables decreased 1.3%, the index for meats, poultry, fish, and eggs remained unchanged, while the other major grocery store food group indexes all increased, none rose more than 0.6 percent.

In contrast, the index for all items less food and energy (the “core” CPI) increased 0.3 percent for the second consecutive month. The indexes for shelter, apparel, new vehicles, used cars and trucks, and medical care all continued to rise in June.

Overall, the CPI-W has increased by 4.1% over the last 12 months from June 2010 through June 2011.

You can see the entire report at Consumer Price Index Summary. The CPI-W figures are in Table 4, a link to which is at the bottom of the page.

Current CPI-W Amounts

July 2010 CPI-W: 213.898

August 2010 CPI-W: 214.205 (+ 0.14%)

September 2010 CPI-W: 214.306 (+ 0.05%)

October 2010 CPI-W: 214.623 (+ 0.15%)

November 2010 CPI-W: 214.750 (+ 0.06%)

December 2010 CPI-W: 215.262 (+ 0.24%)

January 2011 CPI-W: 216.400 (+ 0.53%)

February 2011 CPI-W: 217.535 (+ 0.52%)

March 2011 CPI-W: 220.024 (+1.14%)

April 2011 CPI-W: 221.743 (+0.78%)

May 2011 CPI-W: 222.924 (+1.01%)

June 2011 CPI-W: 222.522 (-0.2%)

CPI-W Amounts For Jul-10 Through June-11

There are 4 colored horizontal lines on the graph. The lowest one, at 215.435, is the baseline CPI-W, which has to be exceeded in July through September for there to be any COLA in 2012. The other lines, at 217.650, 219.805, and 221.960, are the CPI-W amounts needed for COLAs of 1%, 2% and 3%, respectively. As of June, the CPI-W supports a COLA of about 3.26%. I expect that the CPI-W will resume increasing in July. If it averages 224.115 for July 2011 through September 2011, this would support a COLA of 4%. This is 0.72% above where we were in June, so it is still possible

Crude oil has increased in price from about $93.00 a barrel three weeks ago to about $98.00 per barrel now. Gasoline has increased from about $3.58 per gallon ten days ago to $3.67 today. Gasoline prices are expected to continue rising throughout the summer at an average rate of 3 to 4 cents a gallon per week. If this prediction is accurate, then gasoline will be about $3.75 by the end of July. This, coupled with the continuing increase in the core inflation, should give us back the 0.2% we lost in June and perhaps more besides. I will keep track of the daily prices of gasoline and post periodic updates — perhaps weekly.

Remember, it’s where the CPI-W is in July through September that actually determines the following year’s COLA.

The August report from the Bureau of Labor Statistics, showing the July 2011 CPI-W, is scheduled to be released Thursday, July 18. Please check back here the next day.

Medicare

This information is also repeated essentially verbatim from preceding reports, and is repeated here as a reminder.

If we get a Social Security COLA in 2012, Medicare Part B premiums will increase by a significant amount.

Part B premiums have been kept at the 2009 amount, $96.40, in 2010 and 2011, for about 75% of beneficiaries who were eligible for Part B prior to January 2010. According to law, the Social Security check amount cannot be decreased, so beneficiaries entitled before January 2010 could not have their Medicare Part B premiums increased. The Trustees project that the 2012 Part B premium amount will be $111.40, based on the assumption that there will be a COLA in 2012. This is an increase of $15.00.

The average Social Security beneficiary receives $1170.00 per month. Let’s say that we do get a 3% COLA in January, 2012. That would mean that the COLA to a beneficiary receiving the average amount would be an increase of $35.00. That beneficiary’s Part B Premium increase of $15.00 would be deducted from this, leaving a net increase of $20.00 per month.

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9 Responses to 2012 COLA Watch (July Report – Updated Monthly)

  1. Bob Brasher says:

    Thank you again for a wonderful informative site that I look forward to each week getting caught up on pertinent info. Bob

  2. Tony Draper says:

    I’f like to point out a couple of items (which I believe are true):

    1. Some commentators on the internet are saying that even if there is an INCREASE in COLA for 2012, in many cases it will result in a SMALLER net SS benefit amount since the cost for the Medicare Part B will also INCREASE resulting in a smaller SS benefit check for recipients.

    I believe this can’t happen because “there’s a law” (so I understand) that states that an increase in the cost of Part B of Medicare CAN’T be larger than a SS benefit amount increase. That’s why there’s been no increase in the cost of Part B for a couple of years because there’s been no COLA increase during those same years. You can still get a ZERO increase in SS benefits but you can’t get LESS than what you’re currently getting due to an increase in Part B costs. Is this true?

    2. I strongly recommend waiting for as long as you can before applying for SS benefit payments EVEN BEYOND YOUR FULL RETIREMENT AGE. This is because benefits increase significantly
    the longer you wait. (After age 70, there’s no sense waiting since after age 70, benefits do not increase).

    In my case, I applied for SS benefits at my “full retirement age”. But the truth is, I didn’t need the money since I was still working full time (and still am at age 69). When I turn 70 this coming November, my SS benefit would have been significantly higher if I had waited until then to apply. I wish I had done that. Problem is, I didn’t know you could. I thought if I waited I might get “in trouble” somehow.

    (You still should apply for Part B of Medicare at age 65, of course, which you’ll have to pay as an additional expense……you are automatically enrolled in Part A at age 65 (whether you like it or not…at least it’s free). But you have to apply and pay for Part B which is real important to have since it pays for “doctor’s bills, not just Hospital bills).

    In other words, you can be covered by MEDICARE at age 65 WITHOUT receiving SS benefits if you decide to wait to apply for them as I wish I had.

    PS In my opinion, it’s a horrible mistake to apply for benefits at age 62 (which is the earliest age you can do so). Your benefit amount is cut by about 25% by doing that and it can never really be recouped.

    3. Finally…and this is really tricky to understand for some reason. Those I advise about this don’t really seem to understand what I’m saying:

    Although I realize that the vast majority of people look forward to the day they can “retire” and quit working and spend half their working lives talking about this glorious event, there are those who have no problem working beyond 62 or 65 or like me beyond 70. (I guess it depends on the type of job you have).

    The advantage of doing this is that all your income continues to be taxed for SS purposes so that you’re increasing your SS benefits yearly. In my case, after I started drawing SS, I continued to work and guess what? My SS benefits shot up yearly because of the contributions I was still making to SS. In other words, you can draw SS benefits at the same time you continue to work. For some reason, many think that once you start drawing SS benefits you “can’t work” anymore or that SS benefits will stop. That’s not at all what happens.

    • ssapotluck says:

      1. You are exactly right and the commentators are wrong. There is what is called the “hold harmless” provision, which basically says that the amount paid to the beneficiary cannot be decreased if the Part B premium increase exceeds the COLA increase, though at 3+% COLA, which I anticipate, this isn’t too likely.

      2. I agree with you for people who have attained full retirement age (FRA) and have not yet filed for benefits. Those who were born in 1943 or later receive an additional amount over their FRA amount, equal to 2/3 of 1% per month, or 8% per year. People born prior to 1943 the amount is a little smaller. These are called delayed retirement credits, and as you say, they stop in the month of attainment of age 70.

      I disagree for people who choose early retirement. Those who retire early will be ahead of, in dollars received from Social Security, those who wait to attain FRA to retire. The early retirees will be ahead for many years.

      Assume a potential retiree was born in 1949. His FRA is age 66, which he will attain in 2015. His FRA amount is $1,600.00. If he files in the month he attains age 62, his payment amount will be 75% of the FRA amount, or $1,200.00. He will get a total of $57,600.00 from SSA during the 48 months prior to FRA that he receives checks, at a cost of $400.00 per month. (All figures disregard COLAs.) He will be ahead for 144 months (12 years) ($57,600.00 / $400.00) past his FRA, or until the month he attains age 78.

      Assume a second potential retiree was born in 1946. His FRA is age 66, which he will attain in 2012. His FRA amount is $1,600.00. If he files in the month he attains age 62, his payment amount will be 93.3% of the FRA amount, or $1,492.00. He will get a total of $17,904.00 from SSA during the 12 months prior to FRA that he receives checks, at a cost of $108.00 per month. (Again, all figures disregard COLAs.) He will be ahead for 165.7 months (13 years, 9.7 months) ($17,904.00 / $108.00) past his FRA, or until he is age 79 years 9.7 months..

      This was a question I got a lot. Back when I was working at SSA, pretty much everyone had a FRA of age 65. I’d show them the math and suggest they file as soon as possible.

      3. I agree with this one too. Also, early retirees who resume substantial work prior to attainment of FRA may have some months each year when they aren’t eligible for retirement benefits, due to the Annual Earnings Test. When they attain FRA, any months they were in “work suspense” will be removed from the number of reduction months caused by early retirement.

  3. Tony Draper says:

    Thanks for your comments above. I hope you’ll have the time to address this next “tax scenario”. Although it may be applicable to few of your readers, they may still find it interesting. Here goes:

    1. I work overseas so my income (up to about US$95,000) is “tax free” for US IRS purposes. Also, the country I work in (which will remain nameless) has no income tax (hard to believe, I know) neither for its citizens nor for “foreign workers”, like me.

    2. At age 69, I’m still working full time and drawing SS. The problem and my question has to do with SS.

    3. For many years while working overseas, I did NOT contribute to SS (since I didn’t have to AND, I thought, I couldn’t). Therefore, when I applied for SS benefits at FRA, my record showed far fewer years of work than then 35 years SS uses to determine my monthly benefit with the result that my monthly check is “below average”. (My records show 25 years of “covered employment”……..that means 10 years of $0 income in their formula to determine my monthly benefit).

    4. About 4 years ago I discovered that although overseas WAGES are income and SS tax free, SELF-EMPLOYMENT income – even if earned overseas – is subject to SS taxes (even though these same wages remain “income tax” free.). So I quickly became self-employed (part time) and have been paying SS taxes for about 4 years………leaving me still with 6 years of $0 income on my SS records.

    5. Recently, I’ve been told I’m “throwing money away” by doing this – ESPECIALLY because I pay both the “employer’s contribution” and my own. In other words, I pay 15.3% SS tax instead of the regular 7.65% that a US based employee normally pays.

    Specifically, for 2010 I paid $6000 to SS and my monthly SS benefit has been increased by $36/month. My “advisor” pointed out that if I had kept that $6000, I could personally withdraw the same $36 per month FOR 13.9 years!!! (and if invested, those $6000 could ultimately pay me much more than the $36 per month I get from SS.

    6. So my question is: is my advisor right? Should I stop this self-employment and contributions to SS and just keep the money? (I’m self-employed ONLY in order to contribute to SS…..I don’t do it because I “need” to ).

    Many thanks for any comment you’d care to make.

    • ssapotluck says:

      Thank you for your question. It is not one I had specifically encountered before.

      To enlarge on parts of your points 3. and 4., when you pay your self-employment tax to the IRS, they report the amount of your net earnings from self employment (NE/SE) to SSA, usually by October of the year following the year in which the NE/SE was earned. As you said, If this amount exceeds a lower earnings amount that SSA used to determine your benefits, the incoming earnings replace the existing lower amount.

      Normally, SSA starts with all earnings for the years starting with the year in which you attain age 22 through the year you attain age 61. These are “indexed” for inflation. Normally, this is done by the computer, but it can be done manually. For a copy of the worksheet for people attaining age 62 in 2004 (which is, I assume, when you did) please see Indexing Factors for 2004 Eligibility.

      After all wages are indexed, the 5 lowest years are discarded. The indexed amount for the remaining 35 years are added together. The total is called the “dividend.” The dividend is then divided by the appropriate number of divisor months (usually 420 (35 years X 12 months.)) The result is rounded down to the next dollar. This figure is called the average indexed monthly earnings (AIME.)

      When you were self-employed in 2010 and paid $6,000.00 in FICA taxes, this indicates your actual NE/SE for 2010 was $39,215.68. This amount replaced one of the zero years in your earnings history and increased your dividend. Since divisor months remain the same, your AIME also increased, by $93.00 (39,215.00 / 420; rounded down to the next dollar.)

      This triggered a recomputation of your benefits. The PIA computation is based on what are called “bendpoints” The best way to illustrate this is to show how it works. These are the bendpoints for workers whose first year of eligibility (i.e., the year in which he/she attained age 62), which in your case was, I assume, 2004. They continue to be your bendpoints even for later income.

      (a) 90 percent of the first $612 of your AIME, plus
      (b) 32 percent of your AIME over $612 and through $3,689, plus
      (c) 15 percent of your AIME over $3,689.

      Your result was an increase in PIA of $36.00, which indicates that part of it came from (a) and part of it came from (b.)

      Whether you should continue to work as you are now, and pay FICA taxes, is a question best answered by a CPA or financial planner. I personally would find investing money to be very iffy, given what the economy is like, not just here, but everywhere. One thing you didn’t mention was what should you do with the $33,000 plus left over after you paid your FICA tax. You’re 69 now, and it sounds like you are in better health than the average person that age. With luck, you should expect to live for many years.

      Thanks again for a very interesting question.

  4. Rod Jones says:

    Food companies have been participating in the questionable practice of reducing package size while leaving prices the same. For example, many luncheon meats that used to be 1 lb. (16 oz.) packages are now only 14 oz. This is happening across the board, to far too many food products to list here. I’m just wondering if the CPI-W takes this into account accurately. I don’t know exactly what items are included or whether they are based on weight… But this sneaky practice by food companies has the potential to skew (apparent) food prices, and hence the true CPI-W. Someone should be making the powers that be aware of these tactics by food companies. The package size reductions could be food companies’ sneaky way of hiding just how much food prices are rising. How do we make the appropriate government agencies aware of this, so that COLAs are calculated accurately? Someone needs to make sure this is taken into account.

    • Rod Jones says:

      I should mention again, that only the weight of the foods is changing to a lower amount. A 1 lb. package of meat at $3.99 is now a 14 oz. package, for $3.99. Tuna has mysteriously changed from 6 oz. cans to 5 oz. cans. I didn’t even notice this until a friend pointed it out to me. The food companies can only go so far with this, obviously, before too many people begin noticing… but they are getting away with it so far. I just hope the Social Security COLA won’t be affected by these sneaky product weight reductions.

      • ssapotluck says:

        Thank you for your comments. This is a valuable issue for us to explore.

        I have noticed this. I used to participate on a forum board before I started this blog, and we had a thread on this subject for awhile. It is noticed by everyone.

        I do not know whether BLS takes this into account when they are calculating their CPI figures. I will write to them and try and find out. Of course, I shall post any response I get here.on the blog.

        ====

        I just called and spoke to a technician at the BLS. They do take this phenomenon into account. I will write a post to this effect a little later, going into more detail.

  5. Armando says:

    I been browsing through the net and just encountered a page where it says a SS check will never have more buying power (in theory) than the preceding years, and by this, it means that it doesn’t matter what the cola increase is, the SS check will still have the same buying power as the very first check you receive when you retired. In my case I retired in January 2001 on my twenties so I consider I retired at a very early age because of a disability which is under control and I wouldn’t go back to work because aside from my disability, I feel I can make it good with what I get paid. I posted here on this section because I read a comment where early retirement is a good choice because you’ll be ahead in years than if you retired at age 66. But if your check will never have more buying power then I don’t understand why is better to retire early. I’m thinking, if I was to retire in 2012 I would get the same amount I started with in 2001 which was less than $600. Now I get over over a thousand if I count my daughters benefits and over $1700 if I add my medicare part D prescription drugs, because at the beginning I was paying for the drugs when there was no medicare part D, but I was buying across the border so I paid half the price, which was still very expensive.

    My question is, since I retired early, does my check have more buying power?

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