Social Security Benefits Increase for 2014

The Social Security Administration (SSA) announced a benefit increase of 1.5% for 2014.  Social Security benefits are indexed for inflation.  Average retirement benefits will increase by $19 a month to $1,294.  Fortunately, given the small increase, Medicare Part B premiums do not increase in 2014 and consume the increased benefit.

The inflation standard used by the SSA is CPI-W, the Consumer Price Index for Urban Wage Earners and Clerical Workers.  Notice that these are wage earners and there are no retirees in this index.  Retired persons spend more on health care, and those costs have been rising faster than overall inflation.  So over time, retirees who depend on Social Security benefits will suffer a lower standard of living because of the mismatch between the CPI-W and the cost of actual goods and services consumed by retired persons.  Furthermore, discussions for scaling back the cost of the Social Security program have considered replacing CPI-W with so-called “chained CPI.”  Chained CPI grows at a slower pace than CPI-W because it presumes that when prices increase, people will purchase less expensive items by substituting items of lesser quality.  If adopted, chained CPI will further erode retirees’ standard of living.  Therefore, it is imperative for people who wish for a comfortable retirement to save and invest for their future, rather than relying upon Social Security benefits to be the primary source of their retirement income.

Separately, the Social Security wage base, upon which the Social Security tax of 6.2% is imposed, rises from $113,700 in 2013 to $117,000 in 2014.  This is an increase of 2.9%.  The inflation increase for the taxable wage base uses a different index than CPI-W.  The 2014 increase is based upon the national average wage index for 2012 ($44,321.67) as related to the index for 1992 ($22,935.42), then multiplied by the 1994 Social Security wage base of $60,600.00.  The computation is as follows:  $44,321.67 / $22,935.42 X $60,600.00 = $117,106.78; rounded to the nearest multiple of $300.00 or $117,000.00.  See http://www.ssa.gov/oact/cola/cbbdet.html.