After the BLS releases the inflation numbers for September on Thursday, the government will be able to release the Social Security cost-of-living adjustment (COLA) for 2016. The adjustment will become effective with benefits payable for December but received by beneficiaries in January.
Although the first monthly Social Security payments were received in 1940, annual COLAs began being paid 35 years later in 1975. During 1975-82, COLAs were payable for June and received by beneficiaries in July. After 1982, COLAs were payable for December and received by beneficiaries in January.
How the Annual COLA is Determined
The adjacent table documents Social Security COLAs since the 1975 inception. Each year the COLA is calculated based on the change from the Q3 average of the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) from the Q3 average of the previous year, rounded to one decimal place. If the average for the most recent year is below the previous high, there is no adjustment, as was the case in 2010 and 2011. Note that for 2011, the Q3 average was indeed higher than the 2010 average, but it was still below the 2009 average, hence no COLA. For the official announcement of the calculation on Social Security website, click here.
Why the 2016 COLA will be Zero
With the release of Thursday’s CPI-W for September, the 2016 COLA will be established. So far we know that the year-over-year (YoY) change for July was -0.3% and the YoY change for August was -0.3%. If we simply take a linear extrapolation of the CPI-W itself for the last two months, the YoY inflation for September would -0.4%. The quarterly average would not trigger a COLA for 2016.
What would the September CPI-W need to be for even the skimpiest of COLAs — a 0.1% increase? September would have to show a 1 percent month-over-month increase in the CPI-W. A monthly increase of that magnitude has only occurred five times since the turn of the century, the last one being in March of 2011. What are the odds of another one in Thurdsay’s inflation data? Absolutely zero. In fact, a September MoM shrinkage is a far safer bet, largely resulting from the ongoing decline in energy costs, thanks mostly to lower gasoline prices. Since gas prices continued to plummet in September (more here), we will likely see an even smaller YoY change for this third month of Q3.
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