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Thursday, March 28, 2024

Anticipating the 2015 Cost of Living Adjustment for Social Security

Courtesy of Doug Short.

Summary: Tomorrow the Social Security Administration will announce the 2015 COLA. A forecast based on data so far is 1.7%. But Q3 decline in energy prices strengthens the odds of a lower 1.6% adjustment.


Tomorrow the government will release the Social Security cost-of-living adjustment (COLA) for 2015. The adjustment will become effective with benefits payable for December but received by beneficiaries in January.

Although the first monthly Social Security payments were received in 1940, annual COLAs began being paid 35 years later in 1975. During 1975-82, COLAs were payable for June and received by beneficiaries in July. After 1982, COLAs were payable for December and received by beneficiaries in January.

How the Annual COLA is Determined

The adjacent table documents Social Security COLAs since the 1975 inception. Each year the COLA is calculated based on the change from the Q3 average of the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) from the Q3 average of the previous year, rounded to one decimal place. If the average for the most recent year is below the previous high, there is no adjustment, as was the case in 2010 and 2011. Note that for 2011, the Q3 average was indeed higher than the 2010 average, but it was still below the 2009 average, hence no COLA. For the official announcement of the calculation on Social Security website, click here.

Estimating the 2015 COLA

With the release of tomorrow’s CPI-W for September, the 2015 COLA will be established. So far we know that the year-over-year (YoY) change for July was 1.9% and the YoY change for August was 1.6%. As I type this, Investing.com is forecasting a 0.1% MoM change for September in the CPI-U, which would give a 1.6% YoY change. If that forecast is correct, then the 2015 COLA will be 1.7%.

In contrast, Briefing.com is looking for a -0.1% MoM change in the CPI-U. That would put the September YoY at 1.4%, which would give us a 2015 COLA of 1.6%.

Actually, if we simply take a linear extrapolation of the CPI-W itself for the last two months, the YoY inflation for September would be even lower at 1.3%. Even so, the 2015 COLA calculation would still come in at 1.6%.

A September Month-over-Month shrinkage would be the result of the continuing decline in energy costs, thanks mostly to lower gasoline prices. Since gas prices continued to plummet in September (more here), we will likely see an even smaller YoY change for this third month of Q3.

Note: The Investing.com and Briefing.com forecasts are for the more familiar Consumer Price Index for Urban Consumers (CPI-U). The differences between the CPI-U and CPI-W are quite small, but the CPI-W does give a bit higher weighting to energy (read “gasoline prices”), so the happy trend toward cheaper gas over the past few months could well be a drag on the 2015 COLA calculation, increasing the odds of a 1.6% COLA for 2015.

I’ll close with a visualization of COLAs (and I couldn’t resist overlaying a linear regression).

Click to View
Click for a larger image

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