It’s official. Social Security recipients will not receive a benefit increase in 2016. Another year with no Social Security cost of living adjustment.
For 34 straight years, the Social Security Administration increased benefit payments. That streak came to an end in 2010 when they announced there would be no benefit increase. Since then, it’s happened again. Twice. What’s going on and can we expect it to change next year?
Editors Note – This article is a guest post written by Devin Carroll. Devin is the Chief Compliance Officer and partner at Cogent Advisory Group, a Registered Investment Advisor. Additionally, Devin practices as a financial advisor at Carroll Investment Management and publishes the blog Social Security Intelligence where he writes about Social Security and broad retirement issues.
One thing’s for sure, most individuals who are receiving Social Security benefits would tell you that they could have used the increase! In most areas, prices were higher last year. In other words, there was inflation. Then why didn’t you get an increase to your benefit?
Before we dig into the 2015 numbers, it helps to understand how they calculate cost of living adjustments. Stick with me, there’s good news towards the end.
How It’s Calculated
The Social Security Administration started automatic inflation-based cost of living increases in 1975. Prior to that, a benefit increase required a special act of Congress. The intent of the cost-of-living adjustment is to ensure that the purchasing power of Social Security is not exposed to the corrosive effects of inflation.
Beginning in 1975, Social Security benefits are automatically adjusted to reflect the increase in the cost of living as measured by the Bureau of Labor Statistics. The measurement they use is the Consumer Price Index for Urban Wage Earners and Clerical Workers, commonly referred to as the CPI-W. This measurement is meant to reflect the prices that consumers pay for the stuff they buy.
Investopedia has a great video explaining CPI calculations HERE.
Since 1975, the average annual cost of living adjustment has been 3.8%. However, this number includes those massive increases that occurred when inflation was extremely high. For example, the 14.3% increase in 1980 and the 11.2% increase in 1981.
Those increases sure sound nice, but they came as a result of something that wasn’t nice. Prices were skyrocketing! According to the Bureau of Labor Statistics, consumer prices increased by 186% between 1968 and 1983. So even though your Social Security check was increasing, prices of the goods you bought with that check were increasing even faster. With that in mind, it’s probably a good idea to exclude these high numbers in our average.
If we start with the increase in 1984, the average has been 2.71%. That probably gives us a much better indication of what can be expected over the next 30 years.
But what if the next 30 years deliver the same inflation results we’ve had in the last 10 years? What about the last 5 years? Even though the last 10 year period has experienced three years of no inflation increases, the average has still been nearly 2% per year. Over the past 5 years it is still 1.7%.
Hope For 2017
Although it doesn’t take the sting out of not getting a cost of living adjustment for 2016, there may be good news when the next number comes out for 2017.
This year’s CPI report was skewed by energy prices. In other words, that gallon of gas for less than $2 per gallon cost you an increase in benefit payments.
I wanted to dig a little deeper into this, so I reached out to my friend Brandon Renfro. He’s an Assistant Professor of Finance at Louisiana College and has a deep understanding of economic issues. When the topic gets complex, I turn to his expertise. Here’s what he told me.
“Food and energy prices are really the only things that held the Consumer Price Index down. If it wouldn’t have been for the huge drop in energy prices, the CPI would have likely been reported at an increase of 2% to 3%, depending on a few other factors. Although Energy only makes up about 8% of the index, the drop in energy prices was drastic. Once energy prices rebound, it will be reflected in the inflation report.”
There’s our ray of sunshine for a 2017 increase.
If you dig deeper into the Social Security Administration’s rules, you find that they only look at the index at the end of the third quarter. That number is compared with the comparable figure from the third quarter of the last year that there was a COLA. This means that since there was no increase for 2016, the 2017 COLA will be determined by whether or not there was an increase as compared to the third quarter of 2015. So, the 2017 COLA will be calculated based on two years of inflation data.
With energy prices this low, there’s a good chance that a rebound will happen. Possibly a strong rebound. When it does, it’s also likely that the Consumer Price Index, and your Social Security benefit, will increase.
Inflation is the rise in the prices of goods and services, as happens when spending increases relative to the supply of goods on the market.