July 28, 2015

No Cost-Of-Living Adjustment for Social Security in 2016?

Jason J. Fichtner

Former Senior Research Fellow
Summary

Unless there is significant inflation over the next few months, Social Security beneficiaries shouldn't expect a cost-of-living adjustment (COLA) in their benefits for 2016. On the bright side, for those working and paying into the Social Security system via payroll taxes, when there isn't a COLA increase, there's also no corresponding increase in the amount of wage income subject to Social Security payroll taxes.

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Lost in the news surrounding the release of the 2015 Social Security Trustees report is the likelihood that Social Security beneficiaries won't see a cost-of-living adjustment increase, or COLA, in 2016. According to the Trustees, Social Security beneficiaries can expect to receive a COLA increase of 0.0 percent. That's right ... a goose egg.

But first, let's review the more-discussed news from the report. While the outlook for Social Security's combined trust funds is slightly improved, the overall trend for program finances is still very negative. The Trustees report a one-year improvement in the estimated exhaustion dates for both Social Security's Old-Age and Survivors Insurance (OASI), or retirement, trust fund (from 2034 to 2035), as well as its combined OASI and Disability Insurance (DI) trust funds (from 2033 to 2034). The Trustees again project the disability trust fund will be depleted in the fourth quarter of 2016 — just in time for the general elections.

While most think of Social Security as a single program, the OASI and DI trust funds are legally separate because they are designed to serve different purposes and different populations. This split is of urgent importance for DI beneficiaries, as — absent legislative action to shore up the program's finances — benefits will automatically be cut by almost 20% upon the trust fund's depletion, since by law the program can only pay out in benefits what it receives in revenue.

Returning to the issue of the COLA, as the Trustees point out on page 113 of the report:

"Volatility in oil prices has resulted in substantial volatility in recent cost-of-living adjustments. A large cost-of-living adjustment in December 2008 was followed by no cost-of-living adjustments in December 2009 and December 2010. More recent volatility in oil prices has again affected the CPI. As a result, projections under the intermediate- and high-cost assumptions do not have a cost-of-living adjustment for December 2015."

Unless there is significant inflation over the next few months, Social Security beneficiaries shouldn't expect a cost-of-living adjustment (COLA) in their benefits for 2016. On the bright side, for those working and paying into the Social Security system via payroll taxes, when there isn't a COLA increase, there's also no corresponding increase in the amount of wage income subject to Social Security payroll taxes, currently $118,500. While that may be little comfort to those living on Social Security benefits, take heart that the Trustees do expect a COLA for 2017.