Social Security Adjustments Announced Today

With the release of September inflation numbers from the Bureau of Labor Statistics, the Social Security Administration also announced its cost-of-living adjustments (COLA) and change to the maximum amount of income to which the payroll tax is applied. The COLA for Social Security benefits next year will be a 1.7 percent increase, while the taxable maximum will rise from $110,100 to $113,700.

The COLA is calculated based on the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). The SSA calculates the difference between the third quarter estimates (July, August, September) from this year compared to last year's third quarter, yielding the 1.7 percent change.

However, in recent years, there have been suggestions to change the way the CPI is calculated throughout programs in the federal budget (whether the CPI-W or the more widely used CPI-U). We have suggested, along with many other experts and organizations, that using the chained CPI for all calculations would be much more accurate and could help reduce future deficits. Considering the financial state of Social Security and the federal budget on the whole, this could be a useful reform option.

The chained CPI is generally believed to be a more accurate barometer of inflation since it takes account consumers responding to uneven price changes by switching to relatively cheaper substitutable goods in different categories. The chained CPI would fix a problem known as "upper-level substitution bias" in the current CPIs that actually overstate inflation. By our calculation, had COLAs been linked to the chained CPI, the adjustment would have been closer to 1.5 percent.