It looks like 2011 will be another year without a cost-of-living adjustment (COLA) for Social Security recipients. Why? Because consumer prices haven’t yet returned to the peak they reached in the third quarter of 2008, when the 2009 COLA was set.
Beneficiaries received a healthy 5.8% boost in their payments in 2009, which made sense after the sharp run-up in energy prices in 2008. But then energy prices collapsed. The inflation rate used to calculate the COLA was negative from 2008 to 2009. The cold logic of cost-of-living adjustments would thus have implied a reduction in Social Security benefits in 2010. For understandable reasons, however, Social Security doesn’t allow negative COLAs. So benefits remained flat, and 2010 went into the record books as the year without a COLA.
The same thing will happen in 2011. Consumer prices have increased since the third quarter of 2009, but as of the August CPI report, they still fell far short of the peak reached back in 2008. Barring a miraculous surge in inflation in September, that means that 2011 will be the second year without a COLA.
The Social Security Administration will make its official no-COLA announcement on October 15, just a few weeks before the mid-term elections. If last year is any guide, that announcement will set off a flurry of debate about whether Social Security recipients should receive a special benefit adjustment above that implied by the COLA formula (or, in this case, the unCOLA formula) and whether such special payments might be desirable as a form of economic stimulus.
If you are interested in all the facts surrounding the COLA calculation, the incomparable Calculated Risk has a wonderfully detailed analysis.