Cost-of-Living Adjustment Must Be Greater Than Zero

Section 215(i)(1) of the Social Security Act defines the calendar quarters that are to be used in the calculation of a Cost of Living Adjustment (COLA). In particular, the Act defines a "cost-of-living computation quarter" to mean a third calendar quarter with respect to which the Consumer Price Index (CPI) has increased relative to the last such quarter. Simply put, this means that if a COLA becomes effective in any year, the COLA must be greater than zero.

An extended period of deflation could cause the average CPI for the third quarter of a year Y to be less than that for the third quarter of the previous year Y-1. In that case, there would be no COLA effective for December Y. In this case, how would the COLA effective for December Y+1 be calculated? Section 215(i)(1) tells us that the third quarter of Y was not a cost-of-living computation quarter. Assuming that the average CPI for the third quarter of Y+1 is greater than that for the last cost-of-living computation quarter (which was the third quarter of Y-1), then the COLA effective for December Y+1 would be the percentage increase in the CPI between these cost-of-living computation quarters that are 2 years apart.

Example of COLA calculation after one COLA was skipped
The average CPI for the third quarter of 2008 was 215.495, and suppose the average CPI for the third quarter of 2009 is less than 215.495. Hence there would be no COLA for December 2009. Suppose the average CPI for the third quarter of 2010 is 219.805. This value is 2 percent higher than the 215.495 index for the third quarter of 2008, so the COLA for December 2010 would be 2.0 percent.

If there were no COLA, would other automatically increased amounts be affected?
Yes! First, any amount that is directly dependent for its value on the COLA would not increase. For example, the maximum Supplemental Security Income (SSI) payment amounts would not increase if there were no COLA.

Second, if there were no COLA, section 230(a) of the Social Security Act prohibits an increase in the contribution and benefit base (Social Security's maximum taxable earnings), which normally increases with increases in the national average wage index. Similarly, the retirement test exempt amounts would not increase (see section 203(f)(8) of the Act).