The official announcement for 2016 Social Security cost of living adjustment (COLA) will come in October. However, for those who paid attention, it’s widely anticipated that there will be no COLA in 2016.
Social Security COLA goes by the increase in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). That index has been lower in 2015 for eight months in a row than a year ago in 2014.
The gap has been narrower in recent months but it’s still negative. September CPI-W would have to flip to a +0.8% for 2016 Social Security COLA to escape its fate of being zero. It’s not going to happen.
Should retirees want a higher Social Security COLA or a lower Social Security COLA?
Naturally people want a higher COLA. Some mistakenly think that 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 3% higher than the reported inflation. If you get a 0% COLA when the true inflation is 3% and you get a 2% COLA when the true inflation is 5%, you are much better off with a lower 0% COLA with 3% inflation than a 2% COLA with 5% inflation. Your savings last longer with low inflation.
Pray for a lower COLA if you are retired.
[Photo credit: Flickr user FDR Presidential Library & Museum]
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FinancialDave says
Actually,
I don’t care where the COLA goes as it has little bearing on my own expenses. I am more concerned in the ratio of my expense increase in retirement as compared to the increase of my investments — in other words real dollar return. So far so good, but only about a 4 year track record in a market that has been just going up.
Dave
manuel says
The social security cola does not and really cannot meaningfully reflect any individual’s cost of living changes. So I think praying for a 0 cola is ahem a bit whimsical.
Instead I’ll hope my costs are down and the cola is up.
Thanks for the blog.
louis says
Suggesting a lower cola benefits retirees is a false statement, it may mean inflation is lower in general but not across the entire spectrum, it does not mean lower utility cost, not lower cost on all food products or apparel. It does continue to mean lower returns on cd’s and other fixed income investments for seniors. So you must have studied economics and investments somewhere else because your assumptions are toataly without merit and misleading.
Harry Sit says
I get that seniors may experience a higher inflation than wage earners, which the CPI measures. Suppose senior’s inflation is 8% higher than wage earners’ inflation. When wage earners get 0% inflation, seniors get 8% inflation. That’s what you are saying, right? Think if wage earners are already experiencing 5% inflation, then the inflation experienced by seniors will be even higher, at 13% instead of 8%. Having 13% inflation with a 5% COLA is worse than having 8% inflation with zero COLA.
Skip says
This guy is full of it, most of the comments about his misrepresentations are true. When did this guy get his education and logic! Suggest you find someone who livesin the real world..
bobbie says
I don’t understand this article. If the Consumer Price Index follows inflation than the increase for 2016 should be granted. The cost of living (inflation) has in deed increased. Just look at the price of food, clothes, insurance, medical etc. All has increased. My rent is due to increase 4-6% in January and my medical co-payment has increased too. Medicare premiums are increasing also, so I don’t understand why seniors are in fear of not getting an increase. Remember, we still shop, we still VOTE, contribute to the economy…………….so I hope Congress approves the increase !
Matt says
It is not up to congress to “approve” an increase. SS COLA (and a myriad of other changes, such as retirement contribution limits and tax bracket adjustments) are tied to various measures of CPI. As noted in the article, the CPI-W has not shown enough of a change for a COLA to occur this year (official numbers will be out in a few weeks and should confirm this).
It does not matter who you vote for or elect, this is the way the current law works.
Other sources (such as MITs billion prices project) show much the same, inflation is low/non-existent in the US over the past year. This does not mean that your costs have gone down, it just means in aggregate they have.
Skip says
Unfortunately, the lifetime , federal employees that have entrenched themselves firmly within the federal system, will not be able to change anyway the SSA COLA is calculated. Your Congressman is hearing from those “Haves” telling them they are tired of those government handouts. So anybody that wants an increase will have to hope that Obama signs an executive order granting an increase regardless of the CPU-W outcome.
Matt says
Not sure of what exactly you are saying….but a SS COLA has nothing to do with congress, so people lobbying congress about anything has no impact on COLA. Further, it is highly unlikely the president will do so – since no prior president has. In fact, the president has proposed using the chained CPI (which is usually lower than CPI-W) to compute COLA increases for SS.
Skip says
Everything has to do with Congress. SSA COLA can be changed with a bill passed to change anything. Sure by law at this time its the law of the land but an executive order could change the COLA, but I doubt that happening. Since you pointed out that the President was in favor of chained CPI
AnnieG says
If the COLA is likely 0, does that also mean the max income for social security taxes will also remain unchanged? Or do those calculations use different indices?
Harry Sit says
Different indices.
Harry Sit says
I just learned when there is no COLA, the law actually prohibits an increase in Social Security wage base, no matter what the other index comes out to. I didn’t know that.
AnnieG says
Hey, thanks for checking on that! That’s good news for us. We have been going since 2007 with no wage increase, and, after a move to an area both significantly closer to work (DH) and much more expensive (and away from my job, leaving me currently unemployed), money will be a lot tighter in 2016. Every little bit helps.