An explanation of how SS checks increase (COLA calculated) and why it isn't some grand conspiracy.

[Statistical]

An Introduction:
The goal of SS is to provide a FIXED retirement income. In theory a person SS check should never have more BUYING POWER than any prior year. This is an important concept. While the number on the check may go up (nominal terms) the buying power will remain the same. In essence if you check goes up 5% it is because prices went up 5% and the buying power of your check is exactly the same.

You can never get ahead with SS check. If a person is having trouble making ends meet in year 1 of retirment the check getting "bigger" won't help because it simply reflects higher prices. Imagine if SS check doubled but price of everything also doubled. You would be no richer or poorer than before the double.

How SS COLA is calculated
So why did SS checks not rise in 2009/2010? Did Congress "do something"? Was some bill passed to slam seniors? Was it cut from the budget? Is it because Obama is a socialist who hates seniors? No. None of those are true. Since 1976 SS check increases are done AUTOMATICALLY based on the change in CPI-W. It requires no action from Congress or the President. It can't be stopped, or altered without new legislation. CPI-W is an index that reflects inflation. The change in CPI-W between any two points reflects the change in prices between the same two points. As an example CPI-W has increased 31% since 2000 so it is indicating prices have increased 31% since 2000.

Historical CPI-W
http://www.ssa.gov/oact/STATS/cpiw.html

Average CPI-W by qtr
http://www.ssa.gov/oact/STATS/avgcpi.html

Specifically COLA is based on the difference in 3rd quarter CPI-W compared to the prior year 3rd quarter CPI-W.

CPI-W by years (3rd quarter average)
2006 - 199.067
2007 - 203.596
2008 - 215.495
2009 - 211.001
2010 - 214.136

Now lets look at 2007 vs 2006. 203.596 / 199.067 = 2.3% increase. Prices rose 2.3% in 2007.
Lets also look at 2008 vs 2007. 215.495 / 203.596 = 5.8% increase. Prices rose 5.8% in 2008.

Here is SS historical COLA changes:
http://www.ssa.gov/oact/COLA/colaseries.html

2007 = 2.3%
2008 = 5.8%

Notice anything interesting. SS check increase by the difference between current year CPI-W and prior year CPI-W

So why was there no COLA increase in 2009?
Well CPI-W declined in 2009. Prices were actually cheaper in 2009 relative to 2008. Technically in an accurate system SS checks would be reduced 2.1%. They didn't. The legislation in 1976 "locks in" SS checks. They never decrease in falling CPI-W.

What about 2010 prices went up? Everyone knows that
STATISTICAL it is a "scam". You can see CPI-W increase in 2010 but COLA was still 0. Why?
Very good question. While prices DID rise in 2010 vs 2009, they aren't higher than 2008. Remember checks were not reduced in 2008 when prices fell. In essence SS checks reflect the CPI-W of 2008 (215.495). So While CPI-W increased from 211 to 214.136 in 2010 it still isn't higher than the CPI-W "included" in current checks.

A side note it is important to realize that the government isn't saying there was no inflation in 2010 (common claim on DU). Specifically the government is saying THERE WAS PRICE INFLATION IN 2010 however prices are still not higher than peak of 2008.

So what is in store for 2011.
Well it is simple. Three important facts:
1) SS checks reflect a CPI-W of 215.495.
2) When CPI-W is GREATER than 215.495 there will be a COLA increase.
3) The increase in COLA will be the difference between current CPI-W and CPI-W reflected in checks.

Two examples:
Say CPI-W for Q3 2011 is 217.00 what would the COLA increase this year be?
217.00 / 215.495 = 0.7% gain. COLA would be 0.7% increase.

Say CPI-W for Q3 2011 is 220.00 what would the COLA increase this year be?
220.00 / 215.495 = 4.3% gain. COLA would be 4.3% increase.

It is important to note that a larger SS check doesn't mean seniors are better off. SS is a FIXED income system. Buying power NEVER (no matter how long you live) increase. As a historical example SS check in nominal terms (the number amount on check) have increased 31.4% compared to year 2000 however they still only have the same buying power. If your SS check doubles (and eventually given enough time it will) you will still only have the same buying power as your very first check.

[Common Sense Party]

1. Don't confuse us with FACTS, dammit!

Facts get in the way of our OUTRAGE!!!

[William769]

2. I'll take it you don't get a Social security check?

[Statistical]

4. No but my mother does.

Your emotional appeal not withstanding I am simply correcting fallacies that Obama caused senior checks to not rise.

If CPI-W is higher than 215.495 in 2011 (which it likely will be) then SS checks will rise. If we get a lot of inflation (which we might) then they will rise a lot. Regardless it has nothing to do with Congress or Obama if/when they rise or don't rise.

[William769]

5. I for one never said it was Obama.

What I am saying is the formula needs to change.

[jtown1123]

7. Many people agree that is should be changed to a CPI-E (elderly index)

What the OP wanted to point out is that on another thread, someone incorrectly thought recent legislation was passed which resulted in the zero COLA this year.

[Statistical]

9. Well that claim wasn't specifically placed on you.

I do think we should consider an alternate CPI for seniors and base SS checks on that. Obivously seniors tend to have different spending patterns than younger Americans and thus inflation felt by them may be higher or lower than the nation on average.

An honest question?
What do you think the reaction would be if a new CPI was implemented say CPI-S and that CPI-S shows a SMALLER check increase than the traditional CPI-W. Think people would just accept it or do you think the claim would be "seniors get less of an increase than inflation"?

[jtown1123]

6. This is correct. It's not some conspiracy. This is how it is done. There have

been some proposals to change the CPI-W to CPI-E, which better reflects seniors spending since they spend much more on health care than younger workers. That would perhaps make it more fair.

[MineralMan]

8. Well, I do, and when the index rises, so will my payment.

That's how it works. It can't work any other way.

[NNN0LHI]

10. What does whether the OP gets a SS check or not have to do with anything?

I don't understand the point you are attempting to make.

Elaborate please.

Don

[Statistical]

14. I am a cold hearted bastard and anything I say should be discarded because I am not living on SS.

Classic "attack the messenger".

[jtown1123]

3. Thanks for posting this.

[doc03]

11. There is one thing I don't believe you are accounting for

Medicare payments. The cost of living goes up say 3% and you get a 3% COLA. Say you made $1000 a month you would get $30, now the Medicare premium goes up $10. So in reality you are actually receiving a 2% increase. My mother is 91 and has received SS for almost 30 years and I think every year that she has received a COLA the Medicare premiums increased more of a percentage than the COLA did. So SS in truth does not keep up with inflation.

[Statistical]

13. Cost of Medicare is a factor in CPI-W.

CPI-W includes cost of food, energy, transportation, rent, insurance, services (like telecom, internet, etc), healthcare (including both out of pocket costs, and premium increases), entertainment, clothing, etc.

CPI-W is the average price change on all prices not just Medicare. While Medicare premiums may go up faster than inflation many prices have risen slower than overall inflation.

[doc03]

17. So if you were to get a $30 COLA and your Medicare

went up $32 you would stand by that explanation. If you get a 3% COLA and your Medicare premiums increase 25% you are not keeping up. So if you get $30 COLA and Medicare increases $32 that would mean everything else would have to become cheaper for you to keep up with the CPI.

[Statistical]

18. Medicare is only one small portion of total expenditures. n/t

[doc03]

19. I don't buy your explanation at all.

[Statistical]

21. Ok then don't.

Simple fact. CPI-W reflects average price change of all goods & services.
Rising CPI-W doesn't mean all goods & services are rising.
Falling CPI-W doesn't mean ALL goods in services are falling.
It simply means in aggregate goods and services are either rising or falling.

Likewise a CPI-W increase of 5% doesn't mean all goods are services are rising by exactly 5%. Some will be more and some will be less.

[doc03]

28. No sounds like your changing the subject now. My point is the

COLA increase does not fully compensate SS recipients for the cost of living. I remember many times over the years when my mother would get for example $20 for a COLA but her Medicare premium would increase say $15 and her Medicare supplement would increase $20. You tell me how a $20 COLA compensates for the rise in the COL when after the medical cost increases you net a -$15? Did the cost of food, housing, heat etc. all go down? You are talking apples and oranges you average all consumer costs together for a COLA then charge the medical expenses separate. The only way the COLA adjustment would compensate someone for the actual cost of living is if the medical costs were limited to the same average.

[jeff47]

30. You answered your own question

"Did the cost of food, housing, heat etc. all go down?"

Yes. Or at least some of them.

We can spend all the time we'd like arguing about whether or not CPI-W is the correct measure. But arguing against math isn't a productive use of time.

[doc03]

31. I was not talking about the last two years. I know there was no

COLA the last couple years and the Medicare premiums haven't raised, I am not arguing that point. If you read my prior posts you will see. Like I said before, my mother has been getting SS for almost 30 years. I was talking about the last 27 years when they received a COLA. Statistical claims the COLA keeps the SS benefit level with inflation, it doesn't. Every one of those years the CPI increased a certain percentage and the COLA was paid, yet the increase in Medicare took almost all of the COLA at times. I remember on several occasions Medicare and her Medicare supplement increase took back even more than the entire COLA increase. So according to Statistical for example the if CPI increases 3% you get a 3% COLA increase. OK say you made $1000 per month so you get a $30 increase but your Medical premium increases $60 you are minus $30. The average inflation was determined to be 3% and you are now making $30 less after the Medical payments alone, that does not keep up with inflation. They are taking the average to figure the COLA then charging the Medicare separate, it's apples and oranges. They give you an increase for the COLA and if it is taken back by Medical payments unless everything else went down you are behind. The COLA does not compensate SS recipients for the real cost of living.

[taught_me_patience]

12. I think people are mostly complaining about how inflation is calculated

specifically Substitution effect and hedonic adjustments:

Here is a nice blog on inflation from the big picture explaining

http://www.ritholtz.com/blog/2010/01/why-michael-boskin-deserves-our-contempt/

Why Michael Boskin Deserves Our Contempt
By Barry Ritholtz - January 19th, 2010, 9:15AM “The debate about the CPI was really a political debate about how, and by how much, to cut real entitlements.”

-Greg Mankiw, chairman of George W. Bush’s Council of Economic Advisers from 2001-2003

>

I’ve been meaning to get to the absurd argument put forth last week by Michael J. Boskin in the WSJ, titled “Don’t Like the Numbers? Change ‘Em.”

Fred Sheehan saved me the trouble with a brutal takedown of Boskin here.

For those of you who may be unaware, Boskin is the economist/weasel/fraud who helped to officially distort the CPI, making it more or less worthless as a measure of inflation. The Boskin Commission was an act of fraud, a backdoor method to suppress Social Security cost of living adjustments (COLAs). To be blunt, it was an act of cowardice. Rather than man up and say “fix this, its broken, we can’t afford it” the commission took a different route — they fabricated a series of nonsense adjustments that artificially lowered CPI by 1.1%.

The Boskin Commission’s massive government falsehood allowed former Fed Chair Alan Greenspan to take rates to absurdly low levels, as the official CPI data showed no inflation, despite double digit price increases.

As such, he is one of the contributors to the financial collapse.

[bbgrunt]

15. thank you for posting this, taught_me.

[Statistical]

16. Well that is a valid discussion to have

however sadly I wouldn't say "most" are arguing that point.

This OP was based on a rant that Obama passed a law that froze SS payments. We also routinely hear that the government says there is "no inflation". Another false claim the government own number indicate the exact opposite. There WAS inflation in 2010 prices simply aren't higher than the peak of 2008. Lately some have made the claim that no COLA is a result of deficit commission and/or payroll tax holiday. None of that is true.

If CPI-W doesn't accurately reflect prices of seniors (which do have different buying habits than general pop) then lets debate that.
However what do you think would happen if a CPI-E was implemented in say 2012 and it reflected LOWER inflation than the general CPI-W.

[PoliticAverse]

20. Your post misses the main point....

Which is how accurate the COLA formula is in reflecting inflation faced by SS recipients.

For a discussion of this see the following articles:
http://aging.senate.gov/crs/aging9.pdf
http://www.smartmoney.com/personal-finance/retirement/social-securitys-struggle-to-measure-inflation/
http://finance.yahoo.com/news/Social-Security-COLA-Doesnt-usnews-1078699941.html?x=0

[Statistical]

22. That is a valid discussion to have.

I have believed for some time we need an alternate measure of inflation for seniors. As their purchasing patterns differ from the general population.

If this posts leads to that discussion then that would be great.

However lately on DU the discussion hasn't been on the effectiveness of CPI-W to measure inflation felt by seniors. It has been a amalgamation of false claims, statements, and hysterical rants that essentially are Obama bashing.

I would support a CPI-S (senior) index that better reflects inflation as felt by seniors (which can vary significantly from general population). Eventually I will be a senior too. However that isn't the discussion we are currently having. We need to at least inject some facts into the discussion so we can have rational debate. Making false claims (not saying you are) doesn't help the discussion. It simply provides strawmen for the Republicans to defeat.

[SidDithers]

23. Kick...nt

Sid

[girl gone mad]

24. I think you are missing the forest for the trees here.

Maybe get your head out of those neo-classical textbooks once in a while.

the social engineering taking place with these Social Security COLA games amounts to a fraud on the people.

[WinkyDink]

25. It's the premise, not your numbers, charts, algorithms, or calculus. THE BASIC PREMISE is flawed.

ANYONE who buys food or gasoline or clothing or home heating oil or medicines---nothing essential about any of those items, I'm sure---can inform the govt that THERE IS INFLATION.

A dollar for one cucumber? FOUR dollars for a head of cauliflower? THIS? Is why poor families buy Doritos at two-for-one prices and don't eat healthily. But I digress.

If you seriously believe that---for the first time ever and TWO YEARS IN A ROW AT THAT, UNDER OBAMA, who appointed not ONLY a Commission to fix something that ain't broke but additionally appointed as heads Alan Simpson and Erskine Bowles, AND under the same Obama who is reducing SS monetary in-put with his UNIQUE "SS 2% tax 'HOLIDAY'"---THE GOVT IS NOT COOKING THE SOCIAL SECURITY BOOKS in not raising the COLA amounts, well, what can one say then?

There must be a term for "logorrhea with numbers."

[Statistical]

26. There was inflation in 2010 but there was also deflation in 2009.

Gasoline for example although it has gone up (a lot) in 2010 is still less expensive than 2008. Same with natural gas, heating oil, and electricity.

Wasn't the premise flawed when in 2008 the largest COLA increase in the last 30 years happened? I didn't see or hear much complaining. Likely we are looking at a significant COLA increase in 2011 also. Will that be flawed? The same set of formulas showed a COLA increase of 14.3% in 1980 and 11.2% in 1981. Were those flawed?

The nominal value of SS checks has increase over 30% since 2000? No complaints of "flaws" then.

It seems the claim of "flawed" only happens when it accurately showed a single year of deflation in 2009 (the first in over 50 years)?

[Trey9007]

27. Great Post...

Very refreshing to see facts instead of emotional rants..

[doc03]

29. The (facts) are flawed IMO n/t