For other versions of this document, see http://wikileaks.org/wiki/CRS-94-803 ------------------------------------------------------------------------------ Order Code 94-803 EPW Updated October 16, 2008 Social Security: The Cost-of-Living Adjustment in January 2009 Gary Sidor Information Research Specialist Knowledge Services Group Summary To compensate for the effects of inflation, Social Security recipients receive a cost- of-living adjustment (COLA) in January of each year. The Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W), updated monthly by the Department of Labor's Bureau of Labor Statistics (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 5.8% COLA payable in January 2009 was triggered by the rise in the CPI-W from the third quarter of 2007 to the third quarter of 2008. This COLA triggers identical percentage increases in Supplemental Security Income (SSI), veterans' pensions, and railroad retirement benefits, and causes other changes in the Social Security program. Although COLAs under the federal Civil Service Retirement System (CSRS) and the federal military retirement program are not triggered by the Social Security COLA, these programs use the same measuring period and formula for computing their COLAs. Their recipients will also receive a 5.8% COLA in January 2009. This report is updated annually. How the Social Security COLA Is Determined 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). CRS-2 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 CPI-W Index Points July 2007 203.700 August 2007 203.199 September 2007 203.889 Average for Third Quarter of 2007 (rounded to the nearest 203.596 one-thousandth of 1%): July 2008 216.304 August 2008 215.247 September 2008 214.935 Average for Third Quarter of 2008 (rounded to the nearest 215.495 one-thousandth of 1%): Percentage increase from the third quarter average for 2007 215.495 - 203.596 = 11.889 to the third quarter average for 2008 (rounded to the nearest one-thousandth of 1% for initial calculations, but rounded to 11.889 / 203.596 = 5.844% the nearest one-tenth of 1% for the final application, as required by law): COLA = 5.8% Source: BLS data series for the CPI-W for 2007 and 2008. Note: The reference base period for the CPI-W is 1982-1984 (i.e., the period when the index equaled 100). What Else Is Affected Besides Social Security Benefits? 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. CRS-3 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. Although not triggered by the COLA, other changes are tied to the increase in national average wages. In 2009, the amount of earnings needed for a Social Security "quarter-of-coverage" is $1,090 (up from $1,050 in 2008). The monthly substantial gainful activity amount for the non-blind disabled is $980 (up from $940 in 2008), and the amount for the blind disabled is $1,640 (up from $1,570 in 2008). The annual coverage thresholds for domestic workers and election workers increase by $100 from 2008 levels, to $1,700 and $1,500, respectively. 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. 1 For retirees under the Federal Employees' Retirement System (FERS), a different formula is applied and the resulting increases may differ. CRS-4 Table 2. History of Social Security Benefit Increases Amount of Increase Date Increase Was Paid (shown as a percentage) January 2009 5.8 January 2008 2.3 January 2007 3.3 January 2006 4.1 January 2005 2.7 January 2004 2.1 January 2003 1.4 January 2002 2.6 January 2001 3.5 January 2000 2.5a January 1999 1.3 January 1998 2.1 January 1997 2.9 January 1996 2.6 January 1995 2.8 January 1994 2.6 January 1993 3.0 January 1992 3.7 January 1991 5.4 January 1990 4.7 January 1989 4.0 January 1988 4.2 January 1987 1.3 January 1986 3.1 January 1985 3.5 January 1984 3.5 July 1982 7.4 July 1981 11.2 July 1980 14.3 July 1979 9.9 July 1978 6.5 July 1977 5.9 July 1976 6.4 July 1975b 8.0 April/July 1974c 11.0 October 1972 20.0 February 1971 10.0 February 1970 15.0 March 1968 13.0 February 1965 7.0 February 1959 7.0 October 1954 13.0 October 1952 12.5 October 1950 77.0 Source: Social Security Administration. a. Originally computed as 2.4%, the COLA payable in January 2000 was corrected to 2.5% under P.L. 106-554. b. Automatic COLAs began. c. Increase came in two steps. CRS-5 Table 3. Social Security and Medicare Hospital Insurance Taxable Earnings Bases Since the Beginning of the Programs Taxable Earnings Base Year Effective OASDI HI 2009 $106,800 All earnings 2008 102,000 All earnings 2007 97,500 All earnings 2006 94,200 All earnings 2005 90,000 All earnings 2004 87,900 All earnings 2003 87,000 All earnings 2002 84,900 All earnings 2001 80,400 All earnings 2000 76,200 All earnings 1999 72,600 All earnings 1998 68,400 All earnings 1997 65,400 All earnings 1996 62,700 All earnings 1995 61,200 All earnings 1994a 60,600 All earnings 1993 57,600 $135,000 1992 55,500 130,200 1991b 53,400 125,000 1990 51,300 51,300 1989 48,000 48,000 1988 45,000 45,000 1987 43,800 43,800 1986 42,000 42,000 1985 39,600 39,600 1984 37,800 37,800 1983 35,700 35,700 1982 32,400 32,400 1981 29,700 29,700 1980 25,900 25,900 1979 22,900 22,900 1978 17,700 17,700 1977 16,500 16,500 1976 15,300 15,300 1975 14,100 14,100 1974 13,200 13,200 1973 10,800 10,800 1972 9,000 9,000 1968-1971 7,800 7,800 1966-1967c 6,600 6,600 1959-1965 4,800 -- 1955-1958 4,200 -- 1951-1954 3,600 -- 1937-1950 3,000 -- Source: Social Security Administration. a. The HI taxable earnings base was eliminated by the Omnibus Budget Reconciliation Act of 1993. b. The HI taxable earnings base was raised to $125,000 as a revenue-raising measure in the Omnibus Budget Reconciliation Act of 1990. c. 1966 was the first year in which the HI tax was levied. CRS-6 Table 4. Impact of January 2009 COLA on Monthly Benefit Levels Before After 5.8% COLA 5.8% COLA Average Social Security monthly benefit levels: All retired workers $1,090 $1,153 Aged couple, both receiving benefits $1,773 $1,876 Widowed mother and two children $2,268 $2,399 Aged widow(er) alone $1,051 $1,112 All disabled workers $1,006 $1,064 Disabled worker, spouse, and one or more children $1,695 $1,793 SSI federal monthly payment standard: Individual $637 $674 Couple $956 $1,011 Source: Social Security Administration, October 16, 2008. ------------------------------------------------------------------------------ For other versions of this document, see http://wikileaks.org/wiki/CRS-94-803