Consumer inflation pressures have firmed slightly over the past few months but will the recent uptick be enough to provide Social Security recipients with a cost of living adjustment (COLA) in 2017? We will know for certain in a few weeks when consumer inflation data for the month of September are released by the Bureau of Labor Statistics (BLS) but until then we can still speculate about what retirees can expect for next year. Indeed, annual COLAs are based on the percentage increase (if any) in the average level of the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) for the third quarter of the current year (2016) over the average for the third quarter of the last year in which a COLA became effective (2014).
If there is an increase, it must be rounded to the nearest tenth of one percent. If there is no increase, or if the rounded increase is zero, there is no COLA. The CPI-W averaged 234.242 in the third quarter of 2014, and the average for June and August of 2016 is currently 234.849, which means that if CPI-W is unchanged in September at 234.909 (and there are no revisions to the prior two months) then there should be a COLA of 0.3 percent in 2017. Although relatively small, this would still be a welcome improvement from 2016’s complete lack of a COLA, which was only the third such occurrence since the annual adjustment was enacted in 1972 in response to extreme inflation that was rapidly eating away at seniors' benefits. Some may argue that no or low COLAs are an encouraging sign that prices in America are not rising fast enough to quickly erode retirees’ old-age income streams. Unfortunately, that simply is not always the case.
For example, the cost of gasoline over the past year has remained relatively cheap, and food prices have generally plunged. During this same period, though, shelter and medical-care services costs have risen markedly. Since retirees typically drive less (no job) and are more likely to suffer from health complications, their perceived level of inflation could be a lot more severe than what the headline Labor Department data would suggest. Alternative measures of inflation have been proposed but for younger Americans the clear takeaway should be that long-term participation in a tax-advantaged 401(k) retirement plan and other savings vehicles can help limit their old-age dependence on the government (Social Security), and as a result lower their overall sensitivity to annual COLAs.
Sources: U.S. Social Security Administration, Bloomberg, GovExec, U.S. BLSPost author: Charles Couch