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Social Security Benefit Adjustment: Why This Year is Unique

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Yesterday, we reported our forecast that the cost-of-living adjustment to Social Security for 2017 would likely be between 0.2-0.5 percent, or $2-6 added to the average monthly Social Security payment. We are forecasting the smallest adjustment to the “COLA” on record.

Today, let’s shine a light on how we came to that conclusion. The Social Security Administration calculates the annual adjustment by using the Consumer Price Index for Urban Wage Earners and Clerical Workers, or CPI-W.

But the fact that the cost-of-living adjustment is so small doesn’t mean that inflation has been quite that sluggish. Usually, the COLA and the CPI-W, as measured during the third quarter of each year, move in tandem. And if that was always the case, the adjustment for 2017 would be closer to 1 percent.

But the CPI-W was actually negative during the third quarter last year. The Social Security cost-of-living adjustment is not permitted to be negative, so in January of this year, Social Security recipients so no increase in their benefits – but no decrease, either.

However, such decreases in CPI-W offset increases to the cost-of-living adjustment in following years. The third-quarter monthly average CPI-W fell by 0.4 percent from 2014 to 2015. So that amount will be subtracted from this year’s increase.

To read Max Gulker’s short essay on the forecast, click here. The Social Security Administration will announce the actual adjustment on Oct. 18.

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