Current Price Topics: The Use of the CPI in Social Security Cost-of-Living Adjustments (COLAs)
"More than 50 million people currently receive Social Security benefits.[1] In 1972, Congress passed legislation tying Social Security cost-of-living adjustments (COLAs) to changes in the Consumer Price Index. Specifically, these COLAs are based on the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W), All Items, from the third quarter of one year to the third quarter of the next year.

COLA effective for 2009. The third quarter average 2007 CPI-W, All Items index stood at 203.596. The CPI-W average for the third quarter of 2008 was 215.495, an increase of 5.8 percent. (See table 1.) This 5.8-percent cost-of-living increase, which became effective in 2009, was the highest COLA in more than 25 years. The steep rise was due to both sharply higher gasoline prices, which climbed 35.2 percent from the third quarter of 2007 to the third quarter of 2008, and higher prices for food, which increased 6.2 percent over the same period.

COLA effective for 2010. From the third quarter of 2008 to the third quarter of 2009, the CPI-W actually fell 2.1 percent, due in large part to gasoline prices, which dropped 32.5 percent over that period. This was the first time the CPI-W, All Items index had fallen since Social Security COLAs were tied to the CPI. When the CPI-W falls, Social Security benefits do not fall. Instead, they remain unchanged.[2] For this reason, there was no COLA for 2010.

COLA effective for 2011. In the third quarter of 2010, the CPI-W stood at 214.136. Although this was higher than the 2009 third-quarter CPI-W average of 211.001, Social Security recipients will not receive a COLA in 2011. This is because, by legislation, the CPI-W must exceed its previous third-quarter peak, recorded in 2008, in order for there to be a positive COLA the next year. Put another way, because the third-quarter 2010 CPI-W level of 214.136 did not exceed its previous peak of 215.495 in 2008, there will be no automatic COLA in 2011..."