Kyle Burkhalter

Office of the Chief Actuary

Social Security Administration

Cost-of-Living Adjustments

NASI 2017 Summer Academy for Interns

August 10, 2017
Cost-of-Living Adjustments

 Since 1975, Social Security’s general benefit increases 

have been based on increases in the cost of living, as 

measured by the Consumer Price Index (CPI)

 These Cost-of-Living Adjustments (COLAs) are 

effective with benefits payable for December

 Social Security benefits keep pace with inflation

 COLA cannot be less than zero

 Example: If initial PIA is $1,444.50 and it is increased 

by 0.3-percent COLA, the new PIA (truncated to the 

next lower dime) is $1,448.80 2
Consumer Price Index (CPI)

 Bureau of Labor Statistics produces monthly data on 

changes in prices paid for a representative basket of 

goods and services

 Social Security benefit COLAs are based on the 

Consumer Price Index for Urban Wage Earners and 

Clerical Workers (CPI-W)

 COLA = percentage increase (if any) in the average 

CPI-W from Q3 of the last year with non-zero COLA 

to Q3 of current year

 2016 (235.057) is 0.3% increase from 2014 (234.242)

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COLA series, 1975-2016

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Year COLA Year COLA Year COLA Year COLA

1975 8.0 1986 1.3 1997 2.1 2008 5.8

1976 6.4 1987 4.2 1998 1.3 2009 0.0

1977 5.9 1988 4.0 1999 2.5 2010 0.0

1978 6.5 1989 4.7 2000 3.5 2011 3.6

1979 9.9 1990 5.4 2001 2.6 2012 1.7

1980 14.3 1991 3.7 2002 1.4 2013 1.5

1981 11.2 1992 3.0 2003 2.1 2014 1.7

1982 7.4 1993 2.6 2004 2.7 2015 0.0

1983 3.5 1994 2.8 2005 4.1 2016 0.3

1984 3.5 1995 2.6 2006 3.3

1985 3.1 1996 2.9 2007 2.3
Simple, right?

 Bureau of Labor Statistics produces monthly data on 

changes in prices paid for a representative basket of 

goods and services

 CPI-W (and CPI-U) based on experience of the 

relevant average household (spending habits survey 

of 7,000 families)

 Other indices, other approaches

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Chained CPI (C-CPI-U)

 Based on idea that in an inflationary environment, 

consumers will choose less-expensive substitutes

 All indices correct for “lower-level substitution bias” 

(Red Delicious instead of Granny Smith) but not 

“higher-level substitution bias” (apples vs iPhones)

 CPI-W (and CPI-U) weights are adjusted every two 

years, but C-CPI-U is impacted the next month

 By age 85, benefits would be about 6.5% lower

 OCACT estimates C-CPI-U would reduce the annual 

COLA by 0.3 percentage point, on average 6
CPI for the Elderly (CPI-E)

 Basket of goods and services for those age 62+

 Certain expenditure groups, such as medical care and 

housing, are given greater weight (10.8% in CPI-E vs. 

5.3% in CPI-W)

 Medical care costs historically rise faster than inflation

 By age 85, benefits would be about 4.6% higher

 OCACT estimates CPI-E would increase the annual 

COLA by 0.2 percentage point, on average

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Other variations

 Proposals to reduce or increase annual COLA (as 

currently calculated) by a set amount

 Chained CPI-W, chained CPI-E

 Hold disabled (DI), lower earners harmless

 No COLA for high earners

 Different indices for different benefit amounts or 

earnings levels

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So what?

 Changes to the COLA would have greater impact on 

long-range actuarial balance than you might think

 Switching from CPI-W to chained CPI-W starting 

December 2017 = 21% of shortfall eliminated

 Switching from CPI-W to CPI-E starting December 

2018 = 14% increase in shortfall

 Reducing the annual COLA by 1 percentage point 

starting December 2017 = 66% of shortfall eliminated

 Present law shortfall in long-range actuarial balance is 

2.83 percent of payroll (2017 Trustees Report) 9
Resources

 150+ provisions scored annually:

https://www.ssa.gov/oact/solvency/provisions/index.html

 Cost-of-living adjustment provisions: 

https://www.ssa.gov/oact/solvency/provisions/cola.html

 Bureau of Labor Statistics – Consumer Price Index: 

https://www.bls.gov/cpi/home.htm

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