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The UnCOLA: Social Security recipients to get puny cost-of-living boost

Unofficial estimate forecasts benefits will increase by 1.5% to 1.7% in 2013, less than half of the 3.6% increase in 2012.

By Mary Beth Franklin

Oct 9, 2012 @ 4:11 pm (Updated 8:35 am) EST

Social Security

Social Security recipients will receive a cost-of-living increase for 2013, but it will be only about half as large as the COLA they received this year, according to an unofficial estimate by the American Institute for Economic Research, an independent economic research in Great Barrington, Mass.

AIER economists estimate the 2013 increase to be between 1.5% and 1.7%, two percentage points below the 3.6 % increase seniors received for 2012.

The Social Security Administration will announce the official cost-of-living adjustment for 2013 on October 16. The federal government determines the size of a Social Security COLA based on the percentage change in the Consumer Price Index for Urban Wage Earners (CPI-W) from the third quarter of one year to the third quarter of the next.

“Because the CPI-W includes items with prices that rise more slowly than everyday purchases – refrigerators, for example – as well as items that get cheaper over time, the increase in Social Security checks coming in January may not be sufficient to cover the rising cost of everyday goods,” said Steven Cunningham, director of research and education for AIER.

“Seniors who rely on their Social Security checks to cover everyday expenses – food, utilities, gasoline and medical care – may find that a 2013 increase of 1.5% to 1.7% will fail to keep pace with rising prices,” Cunningham said.

A positive COLA change impacts more than just retirees. A COLA increase triggers an increase in the maximum earnings subject to Social Security taxes. This year's maximum is $110,100, and the 2013 increase will be determined by the Social Security Administration later this month.

In addition to a higher maximum taxable wage base, workers may feel an added payroll tax sting in 2013 if the current two percentage point tax holiday on the employee share of FICA taxes is allowed to expire at the end of the year.