Social Security COLA

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sscritic
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Joined: Thu Sep 06, 2007 8:36 am

Social Security COLA

Post by sscritic »

It appears the COLA will be 5.8%. The CPI-W numbers are out.

2007 year 2008
203.700 216.304 July
203.199 215.247 August
203.889 214.935 September
610.788 646.486 Total
203.596 215.495 Average

215.495/203.596 = 1.0584.

Increase = 5.8%

Note that deflation continues for another month!
[OK, two months does not a long term trend make :) ]

The social security webpage has now been updated.
chaz
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Post by chaz »

Thanks for this info and link.
Chaz | | “Money is better than poverty, if only for financial reasons." Woody Allen | | http://www.bogleheads.org/wiki/index.php/Main_Page
mithrandir
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Post by mithrandir »

Since we may be progressing to a deflationary environment (at least yr-to-yr), it is possible that next year's COLA could negative?

5.8% is really a gift to beneficiaries and it does not reflect (IMO) current inflation. Also, I dare one to find a private corporation that is giving their employees an 5.8% average increase next year.

I understand why it's 5.8% - just the "luck of the calendar" - but since the 2008 price baseline is now "so high", could the 2010 COLA be negative? Is it legal to be negative?
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sscritic
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Post by sscritic »

mithrandir wrote:Since we may be progressing to a deflationary environment (at least yr-to-yr), it is possible that next year's COLA could negative?
Good question. I had never looked this up before. Here is part of the applicable social security law.
(A) the term “base quarter” means (i) the calendar quarter ending on September 30 in each year after 1982, or (ii) any other calendar quarter in which occurs the effective month of a general benefit increase under this title;
(B) the term “cost-of-living computation quarter” means a base quarter, as defined in subparagraph (A)(i), with respect to which the applicable increase percentage is greater than zero; except that there shall be no cost-of-living computation quarter in any calendar year if in the year prior to such year a law has been enacted providing a general benefit increase under this title or if in such prior year such a general benefit increase becomes effective; ...

the term “CPI increase percentage”, with respect to a base quarter or cost-of-living computation quarter in any calendar year, means the percentage (rounded to the nearest one-tenth of 1 percent) by which the Consumer Price Index for that quarter (as prepared by the Department of Labor) exceeds such index for the most recent prior calendar quarter which was a base quarter under subparagraph (A)(ii) or, if later, the most recent cost-of-living computation quarter under subparagraph (B);
Bold added.

There is a redundancy in the law: the last paragraph defines an increase as occurring when the index exceeds the previous year, while the first paragraph specifically limits cola adjustments to years in which the increase is greater than zero. In a sense, the law says it twice: the cola can't be negative.
Skew
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Post by Skew »

Even worse (or better, I suppose, depending on whether you are the giver or receiver of SSI benefits), the law seems to imply that in down years the COLA will not go down, but in up years (as compared to only the previous year) the COLA will go up.

What if the annual inflation results are as follows (as compared to the previous year): +5, -5, +5, -5 +5 -5.

The COLA would be adjusted as follows: +5, 0, +5, 0, +5, 0
The net COLA (as compared to the original year) would be as follows: +5, +5, +10, +10, +15, +15
...when the net change in costs of living is in fact zero!
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sscritic
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Post by sscritic »

Skew:

Good catch! However, there has never been a zero COLA. The lowest ever was 1.3% in 1986 and 1998. This year's 5.8% is the highest since 1982 (7.4%).
mithrandir
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Post by mithrandir »

Skew wrote: What if the annual inflation results are as follows (as compared to the previous year): +5, -5, +5, -5 +5 -5.

The COLA would be adjusted as follows: +5, 0, +5, 0, +5, 0
The net COLA (as compared to the original year) would be as follows: +5, +5, +10, +10, +15, +15
...when the net change in costs of living is in fact zero!
Nope, it's actually even worse, because the net change in living costs is not zero, it's negative!

Here's the math: 100 * 1.05 * 0.95 * 1.05 * 0.95 * 1.05 * 0.95 = 99.25, a net change of -0.75%. The math is multiplicative here, not additive.

It takes a 5.26% increase rather than a 5% increase to cancel out a 5% decrease, just as it takes a 66.6% gain to cancel out a 40% loss.

Additionally because COLA cannot be negative, the increase in benefits is not 15% nominal (5+5+5) it's 15.76% (1.05 * 1 * 1.05 * 1 * 1.05).

As the law stands, a period of deflation would be devastating to the long-term health of the SS system.
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