David Lerner Associates News: 2014 Social Security COLA Is.1.5 Percent
Every fall, the Social Security Administration announces whether there will be a cost-of-living adjustment (or COLA) to Social Security benefits for the upcoming year. In October, the SSA announced that the Social Security COLA in 2014 will be 1.5 percent, down slightly from the 1.7 percent COLA increase in 2013. This will result in an average monthly Social Security benefit increase of about $19, bringing the average monthly Social Security check up to $1,294.
From a historical perspective, this is one of the smallest COLA increases ever and reflects the low overall levels of inflation in the U.S. economy over the past year. The Social Security COLA is based on the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W), which has run at about 1.6 percent over the past year. Falling gasoline prices were a big factor in the low CPI-W — they dropped by 7.5 percent between September 2012 and September 2013.
For comparison’s sake, the historical Social Security COLA is 4.1 percent and the 10-year average is 2.5 percent. In 2012, the Social Security COLA was 3.6 percent, but this came on the heels of back-to-back years in 2010 and 2011 when there was no COLA increase due to falling prices for consumer goods in the wake of the recession.
Is the Social Security COLA Fair?
Some experts contend that basing the Social Security COLA on the CPI-W is not fair to many Social Security recipients because older Americans tend to face higher expenses than the rest of the population. For example, between 1982 and 2011, the CPI-E, which measures the inflation rate for Americans age 62 and over, rose at an average annual rate of 3.1 percent, while the CPI-W rose at an average annual rate of 2.9 percent.
There are several possible reasons for this higher rate of inflation among senior citizens, starting with the fact that they tend to spend more money on healthcare. In fact, the share of expenditures on healthcare by the CPI-E population is about double that of the CPI-W population. In addition, medical care inflation increased by 5.1 percent annually between 1983 and 2011, while inflation for all other goods and services excluding healthcare increased by 2.8 percent annually during this time.
COLAs Add Up Over Time
While at first glance a 1.5 percent COLA may not seem like much, it’s important to put this number into perspective, says David Lerner Associates Executive Vice President, Daniel Lerner. “Every little bit helps, especially for seniors who are living on fixed incomes. The COLA provides a degree of inflation protection for Social Security recipients that doesn’t exist with many other income sources. Each individual’s life expectancy is, of course, uncertain, and the Social Security COLA provides some longevity protection that can help extend the life of an individual’s retirement portfolio.”
Lerner points out the fact that while a 1.5 percent COLA might not amount to a whole lot of money in one year, the amounts add up over time. For example, if you receive a monthly Social Security benefit of $2,000 and the annual COLA is 1.5 percent each year over the next decade, in 10 years your monthly benefit will rise to $2,321. In 20 years it will rise to $2,693 and in 30 years it will rise to $3,126.
Material contained in this article is provided for information purposes only and is not intended to be used in connection with the evaluation of any investments offered by David Lerner Associates, Inc. This material does not constitute an offer or recommendation to buy or sell securities and should not be considered in connection with the purchase or sale of securities. Member FINRA & SIPC