The Finance Buff

2015 Social Security COLA

by on 16 Comments

Social Security Exhibit

[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]

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Comments

  1. Since the August CPI is out, the IRA limit of $5,500 is not an estimate anymore. The other numbers that depend on the September CPI, in one form or another, are still estimates, but I have no reason to doubt the numbers given, although the SS COLA coming in at 1.6% rather than 1.7% wouldn’t surprise me.

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  2. I forgot to mention that you can also figure out the new tax brackets today since the tax brackets, like the IRA contribution limit, depend on the average CPI over the last twelve months ending in August.

    P.S. If you know me from elsewhere, you know I am too lazy to actually do the work.

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  3. High COLA could be a benefit or not….

    Key Question: What exactly is in the CPI-W?

    Some of these inflation indices exclude food, gas (energy in general), services, etc — all of which could be major costs in a retiree budget.

    On the flip side, if CPI-W includes a bunch of stuff you personally don’t buy a lot of, then COLA could be a win for you.

    Regardless, it’s really good that there is a COLA with SS…otherwise inflation would eat away at it’s benefit every year.

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  4. Thanks for the links!

    Sounds quite comprehensive…water, sewer, tolls, vehicle license fees, food, energy, medical care, housing, college tuition, etc. Impressive.

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  5. “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 COLA.”

    Written by a loyal republican and capitalist, probably a member of the 1%! If inflation really is 5.1% and I only get a 1.7% adjustment how is that better for me????? That means that I lost 3.4% of my buying power in this one year alone! My costs went up by 5.1% but I only received a 1.7% increase giving me a net loss of 3.4% in my purchasing power in one year!!

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  6. What we would prefer is a FAIR increase that keeps up with inflation.
    And i mean REAL inflation , not the bullshit calculation that the government uses.

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  8. I understand how the Social Security COLA is supposed to be calculated each year. However, what I don’t understand is how in 2009 (to the best of my memory) The President along with Congress were able to “predict” that there would be no Social Security for at least the next two years, and that very scenario came to pass. They should use this same “Crystal Ball” in other decision making efforts.

    That made me believe that they can somehow manipulate the data to suit their purpose. Additionally, they should reevaluate some of the factors in this calculation, as it is quite obvious that the overall cost of living has increased significantly over the past several years.

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    • Anyone that thinks the government does not dictate what the actual COLA will turn out to be probably also believes unemployment is under 6% and skittles come from unicorn butts.

      The BLS has so many ways of manipulating the data that the end result is ALWAYS exactly what they want it to be.

      First of all prices are measured for the third quarter of the year, not for the whole year. Why is that significant? Because the third quarter starts July 1 and ends Sept. 30. Food, fuel, clothing, are all higher July 1 than they are at the end of September. July you are eating a lot of imported food, by September our harvest is well under way and prices drop. Summer gas pricing going into 4th of July is always about the highest all year, by September they are dumping inventory in storage to make way for the winter blends of gasoline. Clothing goes on sale in September for back to school, and to clear summer inventory, they have to make room for the upcoming winter and holiday stuff. Also, major manufacturers introduce new product lines (like next year’s model of autos) around the end of the quarter for the holiday shopping season coming up and have big sales to get rid of old inventory.

      Housing is not only the largest single item in our budgets it is the largest in the CPI weighting, but it is not measured at all. Instead they measure something called homeowners equivalent rents. Sure, they claim to do a small telephone survey of homeowners and ask them what they think they would be able to charge for rent if they had to rent their house out, but homeowners are not in the rental market, how many of them keep up with current rental prices? This sector of CPI is flat out a plug number they can use to achieve the desired final COLA outcome. I can tell you that in this region rents have risen by 40% in the last 2 years and most of that was this year.

      “Volatile” prices are backed out of the calculations when they go up, but oddly not when they go down. Substitution is where they back out beef prices when they double or more in a year because they know you will eat tuna instead, problem is that tuna doubled here also. (Southern Oregon).

      Hedonics is where the price of something has risen but they claim it is improved so you are actually getting more product thus the “real” price is lower and they just make that new price up. For example, go to any phone seller today and you will find the cash price of the iPhone 5s is $699, and the new iPhone 6 is also $699. The BLS claims the iPhone has gone down in price because you are getting more phone and more value for the price. The problem is that the amount of the check we have to write is the same or more for products that are hedonically adjusted. And again, they make this number up so that it does not disturb their desired COLA outcome.

      Then there is chain weighting, if housing for example goes up by 10% they will assume you buy less of it, so they reduce the weighting of the category to a point they find does not alter the already decided COLA for the coming year. And that is NOTHING compared to what the government says it wants, geometric chain weighting, which simply says the weight will always go down as price rises. It is just chain weight on steroids.

      If you want to see inflation which is calculated as it used to be calculated before they simply stopped calculating it and started just making up fictional numbers you can go to John Williams’s Shadow Stats. He has been maintaining his website for many years now, he recalculates and posts articles using the methods in place in both the 1980’s and 1990’s and compares them to the new official inflation data.

      If you are prone to internet anger you might not want to go there because what you will see is that you are like the frog in the pot of water that is slowly boiled to death, we have lost half our standard of living in a very short time. Meaning someone has TAKEN that wealth via an inflation tax.
      http://www.shadowstats.com/

    • Herk – It’s Q3 this year over Q3 last year. Any pattern of food, fuel, or clothing prices going down during the quarter doesn’t result in a lower CPI.

  9. This inflation data they use for Social Security raises is even more of a sad joke when your realize that medical costs are rising astronomically each year and seniors as a group already spend a huge percentage of their income on medical care. Medicare goes up and then most of us need a supplement policy, unless we are penniless enough to qualify for Medicaid and I do mean penniless. Those under 65 can qualify for medicaid on income alone, but we seniors have to be down to our last cent, something like $2000 or $3000 in assets, which includes the money that goes in and out of our checking account each month. So there we are paying a huge percentage of our small fixed incomes for medical insurance premiums alone (Medicare B, Medicare D and Medicare Supplement) and then if you need an expensive drug, you are really in trouble, because an expensive drug will drive you into the “doughnut hole” fairly quickly and then you are stuck paying for most of the cost of some expensive drug that you need for your health, so there go what few assets you have down the drain, so you are exceeding your income by a whole lot of money just to keep up with medical expenses, not to mention that the real cost of living is rising pretty fast. Almost all of us notice this in the grocery store. Of course you have have almost no dollar income in order to get more than $15 or $16 in food benefits. Now lucky us, we will get a few more dollars in Medicare and they will raise all of our medical insurance premiums so that we actually have less dollars, but we are considered richer as far as any programs that help you, because most of those programs use gross income. Somehow though alcoholics and drug addicts get their disability income from Social Security along with a lot more benefits than we seniors who have worked most of our lives get. Something is screwy here.

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