The Social Security Administration (SSA) recently announced that the inflation index it uses to determine cost-of-living adjustments (COLA) has increased over the past year. As a result, Social Security and SSI benefits will both automatically increase by 0.3% in 2017. Here's how the COLA is determined each year, and what it could mean to you in 2017.
How the COLA is determined each year
The short answer is that Social Security cost-of-living adjustments are determined by inflation. If prices increase in a certain year, Social Security benefits (including SSI) are adjusted upward to maintain beneficiaries' purchasing power at a constant level.
The more complex answer is that Social Security COLA depends on the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W, for short). This index is designed to track retail prices as they affect workers, and includes the prices of expenses such as food, clothing, transportation, housing, and medical care.
Annual increases are determined by the change in the CPI-W during the one-year period between the third quarters of the two calendar years preceding the year in which the COLA will take effect. For example, the 2017 COLA was based on inflation data for the year ending in the third quarter of 2016.
Finally, it's important to note that even if the CPI-W decreases, Social Security cannot have a negative COLA. During deflationary periods, Social Security benefits simply remain the same.
Here's what the 0.3% COLA could mean to you
According to the SSA, the average retired worker receives a monthly Social Security benefit of $1,355. Therefore, the 0.3% cost-of-living adjustment translates to about a $4 monthly benefit increase for the average retiree, or about $48 per year. In a nutshell, this isn't a dramatic increase in benefits. In fact, this is the smallest percentage increase in a non-zero COLA year since the system was implemented in 1975.
The average Supplemental Security Income (SSI) recipient receives $540 per month, so the average SSI check will increase by a little more than $1.60. This change will take affect beginning with the December 2016 payment for SSI recipients and in January 2017 for Social Security beneficiaries.
Other 2017 Social Security changes
In addition to the COLA, the Social Security Administration announced a few other changes to Social Security for 2017 for both workers and beneficiaries.
- The maximum taxable earnings amount for Social Security is increasing by 7.3% to $127,200, from the current maximum of $118,500. Because of this and the COLA, the maximum possible Social Security benefit at full retirement age is increasing from $2,639 to $2,687.
- The earnings needed for one quarterly Social Security credit will increase from $1,260 to $1,300.
- For Social Security beneficiaries still working, the thresholds for the earnings test are increasing from $15,720 for those under full retirement age and $41,880 during the year retirement age is reached, to $16,920 and $44,880, respectively.
- The standard SSI payment is increasing by $2 ($3 for couples) to $735 per month ($1,103).
The Foolish bottom line
While the 2017 cost-of-living adjustment is indeed a small amount, it is a positive sign for the U.S. economy. Specifically, there was no COLA for beneficiaries last year because there was no inflation whatsoever. So, this is certainly a step in the right direction, as well as a few extra dollars in retirees' pockets.