Want a Good Raise? RetireSenior citizens can look forward to a major increase in Social Security benefits next year. Unless there is a sudden rush of deflation in the current quarter, the increase will be the largest in 25 years.

Yes, you read that right: the largest in 25 years. Last year, the increase was a very pinched 2.3 percent. Indeed, there hasn’t been an increase over 5 percent since 1990.

Just how big will the increase be?

Try 6 percent.

To be more precise, it will be 5.7 percent if the summer holds no inflation. That means the Consumer Price Index won’t budge for July, August and September. The benefit increase will be 6.1 percent if inflation runs at the 0.2 percent “core” rate for the same period. And it will be more if inflation is higher than the core rate. The last time there was a larger increase was 1982, when it clocked in at 7.4 percent.

The 6 percent figure was not found in my personal crystal ball. Anyone can make a very good estimate of future benefit increases simply by reading how the annual benefit increase is calculated by the Social Security Administration. Then, use Consumer Price Index figures as they are released.

Here’s how it’s done.

The Social Security Administration uses the CPI-W, the Consumer Price Index for Urban Wage Earners and Clerical Workers, as its inflation benchmark. To figure the annual increase, it averages the CPI-W index figures for the third quarter of the previous year and divides that figure into the corresponding figure for the current year. January 2009 will be the first month retirees see the increase in their checks.

Last year the index declined slightly from 203.906 in June to 203.700, 203.199, and 203.889 for July, August, and September. That’s an average of 203.596 for the quarter.

By June of this year the index had risen to 215.223. So if the index is unchanged for July, August, and September, the increase will be 5.7 percent. Have the June index rise by 0.002 each month for core inflation, and the benefit increase will be 6.1 percent. If the index figure rises more over these three months, the benefit increase will exceed 6.1 percent.

Could the increase be significantly smaller?

Sure. But it would require declining prices.

Will retirees be happy with the increase?

I doubt it. My reader mail regularly contains letters from retirees complaining that those in Washington must be smoking something (or at least cooking the books) to come up with their notion of inflation. Some send changes in their home or auto insurance rates, the cost of electricity, or the cost of their prescriptions. Whatever the facts, the conclusion is the same: The CPI doesn’t measure the inflation retirees face. For the record, I think they are right. Medical expenses loom large for retirees.

If you are one of those seniors, however, I have a suggestion. Bite your tongue. Remember the old saying: “I complained that I had no shoes until I met a man that had no feet.”

The workers who pay the bills--- including Social Security and Medicare benefits--- are doing poorly this year. Worker wages appear to be rising at about a 3 percent annual rate. That’s about half the inflation rate.  Medical benefits continue to be squeezed and medical insurance costs continue to rise. It’s not a pretty picture out there in 24/7 land. And that’s not counting the number of workers who no longer have jobs.

Worse, this isn’t a one-year problem. So far this century, retirees are doing as well as workers, perhaps better. Including the 6.1 percent estimate for the 2008 benefit adjustment, retirees have seen their benefits rise slightly more than workers wages have risen since the year 2000 (see table below). This may seem O.K. to some retirees, but it’s not. Workers are working. They are supposed to be rewarded for rising productivity.

But they aren’t. It’s beginning to look like the best way to get a good raise is to retire.

Workers and Retirees, Neck and Neck

This table compares the annual increase in retiree benefits with the annual increase in wages for the average worker.
Year Social Security Benefit Increase Average Worker Wage Increase
2008 6.1percent (est.) 2.8 percent (est.)
2007 2.3 3.8
2006 3.3 4.3
2005 4.1 2.9
2004 2.7 2.1
2003 2.1 2.2
2002 1.4 2.6
2001 2.6 2.7
2000 3.5 3.9
Total 28.1 27.3

On the web:

June CPI announcement from BLS

Social Security CPI-W figures

Calculation of the COLA

History of COLA adjustments from 1975

Annual inflation data

Economic Indicators, June: Worker earnings

December 18, 2005: Workers, Retirees and the Consumer Price Index