For most retirees Social Security is the core component of their retirement income plan. Any increase in Social Security benefits has tremendous value. Social Security is subject to a strange cost of living formula, COLA. Even a small increase is set for life and can then be compounded with future increases. That’s because the rate is never reduced, but can be increased.
So what is strange about the SS COLA? Social Security COLAs are based on the Consumer Price Index For Urban Wage Earners And Clerical Workers, known as CPI-W. It is similar to CPI inflation index that we normally hear about, but includes consideration unique to households with at least 50% of the income coming from clerical or wage-paying jobs. Why only index clerical or wage-paying jobs household inflation, who knows, it’s the government.
So, here is how the new COLA gets set. The COLA effective for December of the current year is equal to the percentage increase (if any) in the average CPI-W for the third quarter of the current year over the average for the third quarter of the last year in which a COLA became effective. If there is no increase, there is no COLA. So it is NOT based on a full year look at inflation, but just the 3rd quarter.
How are we going to get that extra $38,000? Well the maximum husband/wife Social Payment in 2016 is about $58,600, based on one spouse waits till 70, the other spouse gets 50% at FRA. If however, say a wife has her own Social Security that is higher than 50% of her husband’s, she would then get the higher amount at FRA.
The current news reports that the COLA for 2018 could be 2.2%. The SSA says it will release the official COLA number on Friday, October 13 at 8:30 AM! Stay tuned.
For those interested in determining the veal value of their Social Security income from an “investment point of view”, you can read my analysis on how to do this here:
I’ll be closely watching the news on October 13th!