Consumer price index (CPI) and what you need to know
Employers use the consumer price index (CPI) to calculate cost of living increases. Most cities have their own CPI, which measures how prices change regarding the cost for goods and services such as housing, food, and medical care.
While most CPIs increase each year, some cities report a CPI that has remained the same or decreased. Cost of living isn’t guaranteed to change because of the CPI. Search the Bureau of Labor Statistics to find the CPI for your urban area.
It is recommended that your policy neither guarantee annual raises based on CPI increases nor decrease compensation when the CPI decreases. If a raise is given each year, a minimal percentage increase is recommended for the years that the CPI remains the same or decreases. Typically, pay increases are based on merit, market factors, and profitability of the company.
Additionally, social security changes as cost of living changes. For example, the Social Security Administration reported an increase in the CPI from the third quarter of 2014 through the third quarter of 2016. Based on this increase, Social Security and Supplemental Security Income beneficiaries will receive a 0.3% cost of living adjustment. Other 2017 Social Security information includes:
It should be noted that the 7.65% tax rate is inclusive of Social Security and Medicare. 6.20% of the tax rate is the Social Security portion applicable to the maximum amount of earnings and the Medicare portion is 1.45% on all earnings. Individuals with an earned income of more than $200,000 or $250,000 for a jointly filed married couple pay an additional 0.9% on Medicare taxes.
These are all things that are important when calculating cost of living and evaluating pay rates, but as mentioned before the best practice for pay increases should be based on merit, market factors, and profitability of the company.