[Updated with official 2014 COLA adjustment] In line with the CBO estimate provided below, the Social Security Administration (SSA) has officially announced a 1.5% cost-of-living adjustment (COLA) increase for 2014 based on final September inflation figures. The maximum amount of 2014 earnings (taxable maximum) subject to the Social Security tax will be $117,000, up from $113,700 in 2013. The SSA estimates that of 165 million workers who will pay Social Security taxes in 2014, about 10 million workers will pay higher taxes as a result of the increase in the taxable maximum.
Over 60 million social security recipients will be impacted by this change when in takes effect in January 2014. For the average retired worker the 1.5% raise equals about $19 more per month for a total monthly average income of $1,272. The COLA figure will also impact 2014 Medicare limits and adjustments to 2014 401K and IRA contribution limits.
[September 2013] The Congressional Budget Office has forecast a 1.5% COLA raise in 2014 based on preliminary CPI-W data. This is 0.2% less than the 2013 increase and is below 2014 inflation forecasts. The Social Security administration has to officially confirm this figure (around mid-october), but if accurate Social Security and Supplemental Security Income (SSI) benefits for over 60 million Americans will increase by 1.5 percent in 2014. The 2014 increase is significantly below the 2013 increase of 1.7% and 2012 COLA increase of 3.6%, reflecting a persistent low inflation and interest rate environment. The 1.5% increase will be seen in January 2014 payments. For the average retiree this is equivalent to an extra $19 a month.
The COLA increase is based on the percentage increase (if any) in the average Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) for the third quarter of the current year over the average for the third quarter of the previous year in which a COLA became effective. The government publishes the official annual cost-of-living adjustments typically in late October, with changes to social security, retiree benefits and medicare effective for the subsequent year.
Retiree pay increases for military and federal civilian workers is also linked to the COLA adjustment and is automatically adjusted on an annual basis. Federal retirees, whether they are covered by the Civil Service Retirement System (CSRS) or the Federal Employees Retirement System (FERS), will receive the full COLA adjustment. According to the government formula, if the full COLA increase is 3 percent or higher, as it was for 2012, FERS retirees receive 1 percent less than the full increase. So FERS retirees received 2.6 percent for 2012. If the COLA falls between 2 percent and 3 percent, then FERS retirees would receive 2 percent. If the increase is less than 2 percent, as it is in 2013, FERS retirees receive the same as CSRS retirees. In other words, 1.7 percent.
However, adjustments in veterans’ benefits covering disability and survivor are not automatic, and must be approved by Congress and signed into law by the president.