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  • Writer's pictureChris Stein, CFP®

2015 Cost of Living Adjustment

The Social Security Administration (SSA) has announced a 1.7% cost of living adjustment (COLA) for 2015 that will take effect this December. It’s always nice to get a pay raise; however in the eyes of the beholder this pay raise might not feel so satisfying.

Where the 1.7% COLA Comes From

The SSA COLA adjustments are based on the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) which is published by the Bureau of Labor and Statistics.  The purpose of CPI-W is to smooth out how much inflation the average urban worker is experiencing.  It is calculated basically by taking a basket of goods that the average urban worker purchases and finding how much more that exact same basket of goods costs the next year.  And therein lies the problem! If you would like to know how the SSA actually calculates your adjustment you can listen to our post on Social Security Cost of Living Adjustments.

CPI-W vs. Retirees

What many of us already know is that average retirees are not purchasing the same basket of goods that average urban workers are.  Retirees often see greater amounts of their income spent on a basket of goods that has a higher inflation rate than that of an average worker.  Think about it, retirees spend more on health care and we all know how quickly health care costs are rising.  The Bureau of Labor and Statistics actually has an experimental index (CPI-E) to measure the costs that retirees are experiencing. This index indicates that retirees experience inflation at a rate 0.2% greater than their urban worker counterpart.  It may seem like a small number, but it adds up quickly.

In the Eyes of the Beholder

When SSA increases benefits by 1.7%, retirees see a nominal dollar increase but in terms of real dollars they actually lose spending power.  For example, if a $1000 benefit was increased to $1017 (1.7% increase) and the basket of goods that the retiree purchased increased to $1050 (5% increase) then the retiree actually sees a pay cut of $33 ($1050-$1017).  While this example is dramatized compared to the 0.2% difference mentioned above, we have calculated that had SSA used CPI-E rather than CPI-W over the past six years, retirees would have a 14% higher benefit today than they actually do.

For more information on this topic be sure to use the play  button below to listen to our audio post.

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