It helps ensure that benefits keep up with inflation, so beneficiaries can maintain their purchasing power over time.
In this post, we’ll discuss the indexes used to measure the rise in the cost-of-living, as outlined in section 404.272 of the Social Security Act.
There are two indexes used to measure increases in the cost-of-living: the revised Consumer Price Index (CPI) for urban wage earners and clerical workers and the average wage index (AWI). The CPI is published by the Department of Labor and tracks changes in the prices of goods and services typically purchased by urban wage earners and clerical workers. The AWI is the average of the annual total wages used to index a worker’s past earnings when computing their primary insurance amount.
The choice of which index to use depends on the Old-Age, Survivors, and Disability Insurance (OASDI) fund ratio. The OASDI fund ratio is the ratio of the combined assets in the Federal Old-Age and Survivors Insurance Trust Fund and the Federal Disability Insurance Trust Fund to the estimated expenditures from the Funds in a given year. It’s calculated as of January 1 of each year and rounded to the nearest 0.1 percent.
If the OASDI fund ratio is 15.0 percent or more for any year from 1984 through 1988, or 20.0 percent or more for any year after 1988, the CPI is used to measure the cost-of-living increase. If the OASDI fund ratio is less than 15.0 percent for any year from 1984 through 1988, or less than 20.0 percent for any year after 1988, either the CPI or the AWI is used, depending on which has the lower percentage increase in the applicable measuring period.
For example, if the OASDI fund ratio for a year is 17.0 percent, the cost-of-living increase effective December of that year will be based on the CPI.
In conclusion, measuring the rise in the cost-of-living is critical to ensuring that Social Security benefits keep up with inflation. The CPI and AWI are the indexes used to measure the cost-of-living, and the choice of which one to use depends on the OASDI fund ratio. By using these indexes, Social Security can help ensure that beneficiaries receive benefits that maintain their purchasing power over time.
https://www.ssa.gov/OP_Home/cfr20/404/404-0272.htm
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