Social Security Cost of Living Adjustment Likely Largest Since 2011

With inflation ticking upward in 2017, retirees are likely to see the largest cost-of-living adjustment in their Social Security benefits since 2011. With 90 percent confidence, we forecast that the adjustment announced later this week will be between 1.7 percent and 2.1 percent.

Our forecasted increase for the cost-of-living adjustment would add between $23 and $29 to the average Social Security beneficiary’s monthly check, higher than any adjustment since 2011 but still below the average annual adjustment since 2011 of 2.3 percent. It is important to remember that higher adjustments aren’t necessarily good news for seniors, as they are responding to higher inflation.

The Social Security Administration calculates the cost-of-living adjustment using the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). The COLA equals the percentage change in the monthly average of the index for the third quarter of the current year compared with the third quarter of the previous year. The cost-of-living adjustment is announced when the CPI-W for September, the final data point, becomes available.

When the CPI-W falls, as it did from 2014 to 2015, the cost-of-living adjustment is set to zero. However, such decreases are offset by the increases in the index in following years. Because the third-quarter average CPI-W fell by 0.4 percent from 2014 to 2015, that amount was subtracted from last year’s increase. This year’s COLA will reflect the full amount of the third-quarter increase in the CPI-W.

We forecast the final September data point by calculating the range of likely changes in the CPI-W from its value in August. Using the history of month-to-month changes in the index over the past five years, we have determined that with 90 percent likelihood, the September CPI-W will increase between 1.7 percent and 2.1 percent over the third quarter of 2016 (potential values outside this range in recent history would not vary enough to significantly change the conclusions of this analysis). The chart above shows the CPI-W and resulting cost-of-living adjustments for recent years.

This year’s COLA will respond in part to higher gas prices paid by Americans in September 2017 after hurricanes struck Florida and Texas. Gasoline makes up about 4.3 percent of the CPI-W, and average prices nationwide rose as much as 13 percent in September. However, the ultimate impact on Social Security checks will be small. We estimate that higher gas prices will increase the third-quarter CPI-W—and in turn the COLA—by 0.15 percent, resulting in an extra $2 per month for the average Social Security recipient. This event does highlight a flaw in the methodology used to calculate the COLA. If a temporary gas price increase had happened in April, for example, it would not have been reflected in the COLA at all.

Whether individual beneficiaries win or lose this year depends on their household spending patterns. In an economy with inflation, it is not possible to adequately compensate everyone for changes in their costs of living through one uniform adjustment. The best one can hope is that the adjustment compensates seniors on average.

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Max Gulker

Max Gulker is an economist and writer who joined AIER in 2015. His research often focuses on free markets and technology, including blockchain and cryptocurrencies, the sharing economy, and internet commerce. He is a frequent speaker at industry conferences, especially on blockchain technology. Max’s research and writing also touch on other economic topics, including governance, competition, and small businesses.
 
Max holds a PhD in economics from Stanford University and a BA in economics from the University of Michigan. Prior to AIER, Max spent time in the private sector, consulting with large technology and financial firms on antitrust and other litigation. Follow @maxgAIER.