The past couple of years I’ve heard from quite a few folks who are living on social security and were upset to find out that they wouldn’t be getting cost of living adjustments to their Social Security checks. For the 2010 and 2011 tax years there was no increase in the amount that people on Social Security would receive.

This week the Social Security administration announced that there would in fact be a cost of living adjustment made for 2012 after a 2 year hiatus. I’m sure a lot of my readers will be happy to hear the news.

Social Security Cost Of Living Adjustment (COLA)

The Social Security Administration announced earlier this week that after crunching the numbers after the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) was released – it was determined that there would be an increase in Social Security benefits of 3.6%.

Monthly Social Security and Supplemental Security Income (SSI) benefits for more than 60 million Americans will increase 3.6 percent in 2012. The 3.6 percent cost-of-living adjustment (COLA) will begin with benefits that nearly 55 million Social Security beneficiaries receive in January 2012. Increased payments to more than 8 million SSI beneficiaries will begin on December 30, 2011.

So benefits and income will rise slightly for the more than 60 million people who receive Social Security income.

How Does The COLA Work?

The cost of living adjustment is made to Social Security benefits in order to ensure that the purchasing power of the dollars given to recipients isn’t eroded over time. Here’s how it works, from the government site:

The purpose of the COLA is to ensure that the purchasing power of Social Security and Supplemental Security Income (SSI) benefits is not eroded by inflation. It is based on the percentage increase in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) from the third quarter of the last year a COLA was determined to the third quarter of the current year. If there is no increase, there can be no COLA.

So the CPI-W from the 3rd quarter of the previous year is compared to the 3rd quarter of the current year. If there isn’t an increase, then there isn’t an increase – simple as that.

How Often Are Cost Of Living Adjustments Made?

Normally there is a cost of living adjustment made just about every year tied to the Consumer Price Index. If the CPI-W hasn’t gone up, then there is no adjustment made. In the past, however, just about every year has seen an adjustment, until the last two years. Here’s a look at the COLA for Social Security from 1975, when automatic increases started, to 2012.

So as you can see not receiving a cost of living adjustment in 2010 and 2011 was upsetting for quite a few people since there had always been an increase. Since increases are tied to the Consumer Price Index by law, however, there wasn’t much to be done.

The thing is, people often mention the two years of no increase in benefits, but don’t mention the larger than normal increase in 2009 of 5.8%. TheFinanceBuff.com explains why that is significant:

..people conveniently forget that there was an unusually large 5.8% increase in 2009 . It was unusually large in 2009 because CPI spiked in Q3 2008. Had the increase been calculated using Q4 averages instead of Q3 averages, the Social Security COLA increases would have been 1.3% in 2009, 1.8% in 2010, 1.5% in 2011. Social Security recipients are actually better off with a 5.8% increase up front followed by zero increase for two years than with small but steady increases in last three years.

When the Social Security program started there was no adjustment made to benefits on a yearly basis at all – so someone entering the program would receive the same benefits year in and year out. It was realized quickly thereafter that inflation was eating into those benefits and some change was needed. Eventually legislation in 1972 mandated the automatic increases tied to the Consumer Price Index.

How Much Extra Will Be In My Check?

So with the increase, how much extra will be showing up in the average Social Security check?

Nearly 60 million Americans receive benefits, with an average monthly check coming in at nearly $1,100. The COLA increase would translate to a roughly $39 increase.

So a $39 average increase in benefits for 60 million Americans. How will this increase be paid for? An increase in taxes and withholding for current wage earners of course!

The maximum amount of earnings subject to the Social Security tax (taxable maximum) will increase to $110,100 from $106,800. Of the estimated 161 million workers who will pay Social Security taxes in 2012, about 10 million will pay higher taxes as a result of the increase in the taxable maximum.

So some will see an increase in benefits, and some will see tax increases.

What are your thoughts on the increase in benefits for Social Security? Do you think it’s high time an increase was made, or do you think that increases shouldn’t necessarily be automatic? Tell us your thoughts in the comments!