Social Security: seniors to see COLA increase in 2012

After two years with no increase in Social Security benefits, senior citizens should see a cost-of-living adjustment in January, a nonprofit group says.

The exact size of the COLA is yet to be determined, but it should be somewhere between 3.5 and 3.7 percent, according to a new report from the American Institute for Economic Research (AIER), a nonprofit research group based in Barrington, Mass.

COLA is a measure that ensures Social Security benefits keep pace with inflation.

Why is that such a big deal? Before 2010, COLA had gone up every year since 1975, the first year that COLA increases went automatic. The size of the COLA automatically adjusts itself based on the annual percentage change in consumer prices. When consumer prices go up, COLA goes up.

But by the start of 2010, in the aftermath of the Great Recession, consumer prices over the 12 previous months had dropped. And before COLA could increase again, consumer prices had to be higher than they were at their peak. That didn't happen for 2011.

“It’s important to remember that the typical older American today lives on an income of roughly $20,000, and Social Security keeps nearly a third of older Americans out of poverty," said Tiffany Lundquist, spokeswoman for the AARP, a Washington-based advocacy group for seniors, in a statement. "After two years with no COLA and increasing costs for food, utilities and health care, every dollar of the modest average benefit of $14,000 is critical.”

When the Consumer Price Index goes down, COLA remains flat, because benefits cannot be reduced, by law.

But just because consumer prices and cost of living went down as a whole, that doesn’t necessarily mean that they went down for retirees and seniors in that period.

“The COLA index is based on average price of goods and services as consumed by workers, not by retired people,” says Polina Vlasenko, an AIER research fellow. “Retirees tend to spend more on health-care and goods and services, and those prices increase faster than the national average. So COLA may not fully compensate for what that they spend their money on. The index isn’t ideal for retired persons, but it is what it is.”

“The exact size of the cost-of-living adjustment should be known on Wednesday [Oct. 19] or soon thereafter, when the Bureau of Labor Statistics releases the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) for September 2011,” the AIER said in a statement.

The cost of living adjustment will trigger other changes, including an increase to the maximum individual earnings subject to Social Security taxes. Currently, an annual income of $106,800 is the maximum, but that number is likely to go up with the COLA increase.

The AIER also expects the increase to affect Supplemental Security Income benefits, which provide aid to the blind, disabled, and those 65 years of age or older with little or no income.

A comprehensive list of all changes will be published in the Federal Register by late October, accessible here.