CRS Updates Report on Social Security Cost-of-Living Adjustments

An automatic Social Security benefit increase reflects the rise in the cost of living over roughly a one-year period. The CPI-W, updated monthly by the BLS, is the measure used to compute the change. The Social Security COLA is based on the percentage change in the average CPI-W for the third calendar quarter of the previous year to the third calendar quarter of the current year. The COLA becomes effective in December of the current year and is payable in January of the following year (Social Security payments always reflect the benefits due for the preceding month).

The January 2009 COLA

The amount of the January 2009 COLA became known on October 16, 2008, when the BLS announced the September 2008 CPI-W figure. The release of the September 2008 index amount made the comparison of the two July-September sets of CPI-W figures needed to compute the COLA (one for 2007 and another for 2008) possible. Table 1 shows how the January 2009 COLA is computed under procedures set forth in Section 215(I) of the Social Security Act.

     Table 1. Computation of the Social Security COLA, January 2009

Social Security COLAs trigger increases in other programs. SSI benefits, veterans' pension benefits, and railroad retirement "tier 1" benefits (equivalent to a Social Security benefit) are increased by the same percentage as the Social Security COLA. Railroad retirement "tier 2" benefits (equivalent to a private pension) are increased by an amount equivalent to 32.5% of the Social Security COLA. Although COLAs under the CSRS and the federal military retirement system are not triggered by the Social Security COLA, these programs use the same measuring period and formula for computing their COLAs. Their recipients also receive a 5.8% COLA in January 2009.¹ The COLA also triggers other changes in the Social Security program, including the following items indexed to the increase in national average wages:

• Taxable Earnings Base. The Social Security (or Old-Age, Survivors, and Disability Insurance -- OASDI) taxable earnings base (the maximum amount of annual earnings subject to Social Security payroll taxes) will increase to $106,800 in 2009 (from $102,000 in 2008).

• Exempt Amounts Under the Social Security Earnings Test. The exempt amount under the earnings test is the maximum amount of earnings allowed before a Social Security recipient's benefits are affected. In 2009, for persons who are below the full retirement age (FRA) and will not reach the FRA during that year, the annual exempt amount is $14,160 (up from $13,560 in 2008). There is a withholding of $1 of benefits for every $2 of earnings above this exempt amount. The earnings test no longer applies beginning with the month a recipient reaches the FRA. During the calendar year in which a recipient reaches the FRA, a higher exempt amount applies for those months preceding the individual's attainment of the FRA. In 2009, for persons who will reach the FRA in that year, the annual exempt amount is $37,680, or $3,140 per month (up from $36,120, or $3,010 per month, in 2008). There is a withholding of $1 of benefits for every $3 of earnings above this exempt amount.

Tables 2 and 3 show the history of increases in Social Security benefits and the taxable earnings base. Table 4 shows the effect of the January 2009 COLA on monthly benefit levels.

     Table 2. History of Social Security Benefit Increases