There is no great mystery to calculating the annual Social Security COLA. The COLA is based on the change in the CPI-W from one year to the next using the average CPI-W for the months of July, August and September.
The calculation is done as soon as the CPI-W figure is known for September, usually mid October. Let’s look at an example. The 253.412 is the average CPI-W for July, Aug, Sep 2020. In this example the 261.237 is the CPI-W for April 2021
EXAMPLE: 253.412 – 261.237/261.237 X 100 = (adjusted to the nearest 1/10 of 1 percent) = 2.995 or 3%
The Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W)increased 4.7 percent over the last 12 months to an index level of 261.237 (1982-84=100). For the month, the index rose 0.9 percent prior to seasonal adjustment. Bureau of Labor Statistics
What goods and services does the CPI cover?
The following is from the Bureau of Labor Statistics
The CPI represents all goods and services purchased for consumption by the reference population (U or W). BLS has classified all expenditure items into more than 200 categories, arranged into eight major groups (food and beverages, housing, apparel, transportation, medical care, recreation, education and communication, and other goods and services). Included within these major groups are various government-charged user fees, such as water and sewerage charges, auto registration fees, and vehicle tolls.
In addition, the CPI includes taxes (such as sales and excise taxes) that are directly associated with the prices of specific goods and services. However, the CPI excludes taxes (such as income and Social Security taxes) not directly associated with the purchase of consumer goods and services. The CPI also does not include investment items, such as stocks, bonds, real estate, and life insurance because these items relate to savings, and not to day-to-day consumption expenses.
For each of the item categories, using scientific statistical procedures, the Bureau has chosen samples of several hundred specific items within selected business establishments frequented by consumers to represent the thousands of varieties available in the marketplace. For example, in a given supermarket, the Bureau may choose a plastic bag of golden delicious apples, U.S. extra fancy grade, weighing 4.4 pounds, to represent the apples category.
What I find interesting about the government COLA is that because of rounding and the fact that they only look at inflation in the third quarter, you get less. I retired from the USAF in 1995 with a monthly benefit of $1,026, it has grown to $1,768 per month in 26 years. When I use the BLS CPI-U inflation calculator, I get $1,823. So, I am short $55 per month.
The rounding is up so that’s is a minor benefit. The COLA is based on the CPI-W so it will be slightly different then the CPI-U. It’s not just inflation in the third quarter, it’s year over year from one third quarter to the next. The average for three months smooths out any blip up or down.
The rounding is down. My SS benefit was $911 per month X 1.3% COLA = $11.84. My new benefit as of Jan 2021 is $922. So I am being shorted 84 cents per month.
I was referring to the rounding of the COLA percentage.
That’s correct, but most people know that: ( (261.237 – 253.412) / 253.412) = 3.1
I did it again and now I get 2.995..
I cannot explain that. but I did it in Excel and got 3.1 – also, in a recent posting, you said 3.1 (I can’t find that posting)
For ease in understanding, it would be appreciated if you (both) would include parentheses when laying out your formulae. Depending on which order you do the calculations, your numbers can co all over the place
Mr. Quinn – I think you meant to say 261.237 – 253.412 / 253.412 = 3.1 ?