Unless something unexpected happens, we will have positive inflation for 2010, but I do not expect Social Security benefits to increase for 2011. That seems unfair—until we look at the larger picture.
Social Security benefit increases for a calendar year are based on the ratio of the average CPI-W (CPI for Urban Wage Earners and Clerical Earners published by the Bureau of Labor Statistics) factors for the previous July, August and September as compared to the highest average CPI-W for any previous July, August, September period. If inflation monotonically increases (that is there are no decreases) the comparison is from one year’s third quarter average to the previous year’s third quarter average. That’s what happened with the CPI-W index for all years through and including 2008, resulting in annual Social Security benefit increases.
In 2008 the average was 215.495, a whopping 5.8% higher than 2007’s 203.598—and for 2009 Social Security beneficiaries received this 5.8% increase. [You may recall oil prices were skyrocketing during that period, driving up the CPI.]
Oil prices declined, the world went into recession and prices declined. In 2009 the CPI-W third quarter average was only 211.001, a 2.2% decrease from the previous year. Fortunately for Social Security recipients, benefits may not be decreased because of decreases in CPI-W, and so for 2010 they remained unchanged. While it didn’t feel like it to retirees, from a math geek’s perspective, they were getting a bonus during 2010 because their benefits did not decline—relative to the index they were getting a raise.
July 2010’s CPI-W was 213.898—higher than last year, but still not as high as 2008. Unless inflation increases significantly in August and September (it would need to increase at an annual rate of roughly 9%), the average for 2010 will be less than 2008’s average. Consequently, no increase in benefit levels for 2011.
The outlook for a 2012 increase is reasonable. The CPI-W is only about 1.1% below its all-time high in July 2008 and for the last twelve months the CPI-W increased about 1.6%, although the rate of increase has declined recently.
For those not receiving Social Security benefits, the lack of a cost-of-living adjustment will also mean the contribution and benefit base for 2011 will remain unchanged from 2010 (and 2009) even though average wages have continued to increase. Once the average third quarter CPI-W does exceed 2008’s level, the wage base will increase based on the National Average Wage Index.