Retirees won’t get a Cost of Living Adjustment this year. Should they?

On Friday, the Social Security Administration is likely to announce the Cost of Living Adjustment (COLA) that will be paid in 2011. It is almost sure to be zero. As no COLA was paid in 2010, this will be the second year in a row without an inflation adjustment.

From August 2009 through August 2010, the most recent data we have available, the Consumer Price Index for Urban Workers (the CPI-W) rose by 1.4 percent. Social Security uses the CPI-W to calculate COLAs, so how can there be no COLA scheduled for next year?

The reason is that in the prior year—August 2008 through August 2009—the CPI dropped by 2 percent. But since the Social Security law doesn't allow for a negative COLA, beneficiaries simply received a zero COLA for 2010. In effect, this means that the purchasing power of their benefits rose by around 2 percent. To make up for that, Social Security will continue to pay zero COLAs until the CPI catches up to its previous level. Overall, retirees aren't really being hurt, even if it looks bad.

Moreover, there is some good news for retirees: for around 90 percent of beneficiaries, Medicare Part B premiums do not increase in a year in which no COLA is paid. Since no COLA was paid in 2010, the scheduled increase in monthly premiums from $96.40 to $110.50 wasn't applied. This saves the typical retiree around $169 per year. In 2011, Part B premiums were scheduled to rise to $120.10 per month, but with no COLA paid that increase also will be averted. That will save retirees an additional $115 per year. Put together, next year's Part B premiums will be almost $285 lower due to the lack of COLAs being paid. 

For more on the Social Security COLA, see my New York Times
piece from earlier this year, co-authored with Alicia Munnell of Boston College, and my Retirement Policy Outlook.