[Updated on October 22, 2014. New CPI number confirmed the 1.7% COLA projected here a month ago.]
The official announcement for September 2014 CPI came in. This made is possible to calculate Social Security COLA for 2015.
Inflation was still low so far this year, but it was higher than the previous year. According to the government, the Consumer Price Index for Urban Consumers (CPI-U) in September 2014 was 1.7% higher than the same measure a year ago in September 2013. The annual Social Security cost of living adjustments (COLA) uses a different CPI series, the CPI-W. It’s a similar situation there. CPI-W in September 2014 was 1.6% higher than CPI-W in September 2013.
Based on these CPI numbers, the 2015 Social Security COLA will be 1.7%. It’s slightly higher than the 1.5% number for 2014.
Should retirees want a higher Social Security COLA or a lower Social Security COLA?
Naturally people want a higher COLA. Some mistakenly think the Social Security COLA is given arbitrarily by the President or Congress, and they want their elected officials to take care of the seniors by declaring a higher COLA.
That’s not the case. The calculation is automatic. It goes strictly by inflation. You get a higher COLA only if inflation is higher. A higher COLA with a higher inflation does you no good. Contrary to intuition and many people’s belief, you want a lower COLA. A lower COLA means lower inflation, which means lower expenses for retirees, which makes your savings last longer.
Some say the government deliberately under-reports inflation. Even if that’s the case, you still want a lower COLA. Suppose the true inflation is three times the reported inflation. If you get a 1.7% COLA when the true inflation is 5.1% and you get a 3% COLA when true inflation is 9%, you are much better off with a lower 1.7% COLA with 5.1% inflation than a 3% COLA with 9% inflation.
Pray for a lower COLA if you are retired.
For those still working, the 2015 401k/403b contribution limit will go up to $18,000. Those over 50 can contribute additional $6,000. The 2015 IRA contribution limit will stay the same at $5,500. Read more in 2015 401k 403b IRA Contribution Limits.
[Photo credit: Flickr user FDR Presidential Library & Museum]