Social Security adjusts to inflation by a different Consumer Price Index than the tax brackets and 401k and IRA contribution limits. It uses Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) instead of Consumer Price Index for All Urban Consumers (CPI-U). When you hear news reports talking about inflation and the CPI, they are usually talking about the CPI-U.
When Social Security calculates inflation, they also use the Q3 average year over year. In other words, compare the average CPI-W from July 2012 to September 2012 with the average CPI-W from July 2011 to September 2011. This will determine the Social Security COLA increase for 2013.
September 2012 CPI-W won’t be released until mid October. I estimate it will be a 0.2% increase from August. This is the average monthly increase so far this year. If that’s the case, the Q3 average CPI-W will have increased 1.6% over the Q3 average CPI-W last year.
[Update on October 16, 2012: The CPI-W in September is up 0.5% from August. This makes the Q3 average 1.7% higher than previous year.]
So there’s the number:
1.6% 1.7% Social Security COLA increase in 2013.
The increase will be first seen in the December 2012 benefits, payable in January 2013.
Medicare Part B Premium
If a Social Security recipient is enrolled in Medicare Part B, which covers doctor visits among other things, the Medicare Part B premium will be deducted from the monthly Social Security benefits. Whenever people talk about Social Security COLA, I always hear some say the COLA will be eaten up by the Medicare Part B premium increase.
Here the thing: one has nothing to do with the other. Deducting Medicare Part B premium from Social Security benefits is merely a convenience for the government. You can delay Social Security and still enroll in Medicare. Or you can start Social Security early and not be eligible for Medicare yet. Or you can reject Medicare Part B altogether if you don’t want it.
Social Security recipients are still getting a Social Security COLA no matter how large the Medicare Part B premium increase is. If Medicare Part B isn’t a good value, people should just dis-enroll and keep 100% of the Social Security COLA. If it’s still a good value, what’s the problem with the premium increase? A good deal not as good as before is still a good deal.
Social Security Wage Base
For those still working, the Social Security Wage Base is the maximum pay subject to Social Security tax. It’s $110,100 in 2012.
The Social Security Wage Base adjusts by another index called the Average Wage Index (AWI). It’s two years behind: the AWI change in 2011 over 2010 determines the change in the Social Security Wage Base in 2013. There is no monthly release for AWI. We just have to wait for the official press release.
If I have to guess I will give it a 2% increase. That will make it $112,300.
[Update on October 16, 2012] The Wage Base will go up from $110,100 in 2012 to $113,700 in 2013. That’s a 3.3% increase.
Remember the 2% employee temporary payroll tax holiday will go away in 2013. We can’t be on holiday forever.