January marked the first time in three years that retirees saw an increase in their Social Security checks.
After two years without an inflation adjustment, the Social Security Administration announced late last year that it will make a 3.6 percent cost-of-living-adjustment to Social Security benefits and SSI payments. You should see this increase in your January benefits check.
That announcement was welcome news to retirees, many of whom have felt the hardships of a troubled economy, including rising costs, slumping home equity and low returns on fixed-income investments.
What is COLA?
Cost-of-living-adjustments, or COLAs, were created to help Social Security and Supplemental Security Income (SSI) benefits keep pace with inflation.
As a result, if Charles received $10,000 last year for Social Security benefits, and COLAs for this year were 3.6 percent; his benefits for this year would be $10,360.
The legislation for COLA was created during the 1970s, when inflation was very high.
How is a COLA calculated?
The Social Security Act specifies a formula for determining each COLA. According to the formula, COLAs are based on increases in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). CPI-Ws are calculated on a monthly basis by the Bureau of Labor Statistics.
A 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 an increase, it must be rounded to the nearest tenth of one percent. If there is no increase, or if the rounded increase is zero, there is no COLA.
There was no COLA in 2010 and 2011 because the CPI-W for those years did not increase above the level of the third quarter of 2008, the last year a COLA was determined.
How will it impact you?
As a result of this COLA, the average monthly check for the elderly will jump $42 from $1,177 to $1,219.
However, if you’re like many other retirees, it’s likely you may not receive the full amount of the COLA increase. That’s because the expected hike in Medicare Part B premiums could eat up part of the raise. For some beneficiaries, their Social Security increase may be partially or completely offset by increases in Medicare premiums. To review 2012 Medicare costs, visit http://www.medicare.gov/.
Another thing to consider is maximum taxable earnings for 2012. Based on the increase in average wages, the maximum amount of earnings subject to the Social Security tax (taxable maximum) will increase to $110,100 from $106,800, according to the Social Security Administration.