The short answer is yes: Social Security benefits are adjusted for inflation. This adjustment is known as the cost-of-living adjustment (COLA). Each year, the Social Security Administration (SSA) decides whether the following year's benefit will include a COLA and, if so, how large it should be. Contribution levels into the program are also linked to inflation.
Social Security benefits were not always inflation-adjusted—that started in the 1970s. Let's take a look at what prompted the SSA to implement the COLA and how it is determined.
- Social security benefits, as well as contributions, are linked to changes in inflation over time.
- The Social Security Administration enacted the COLA in the 1970s, in the wake of double-digit inflation.
- The COLA is based on increases in the Consumer Price Index for Urban Wage Earners and Clerical Workers.
How the COLA Got Started
For the Social Security program's initial four decades, benefit amounts did not increase automatically based on higher living costs. They changed only through the adoption of legislation. However, high rates of inflation in the 1970s—which was particularly hard on seniors with fixed incomes—prompted Congress to modify the program so that inflation would trigger increases in benefit amounts.
Congress enacted the cost-of-living adjustment in 1972. The removal of the dollar from the gold standard, rising oil prices, supply shocks, and other factors had triggered unprecedented inflation that would plague the remainder of the decade.
Social Security recipients do not always receive an annual COLA increase.
While workers received some relief from rising prices—since their wages also climbed—seniors on fixed incomes struggled badly. The COLA was a necessary addition to Social Security to ensure that beneficiaries with no other sources of income could still pay their bills.
How the Cost of Living Adjustment Is Determined
The COLA is based on the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W), as calculated by the Bureau of Labor Statistics (BLS), part of the Department of Labor. The CPI-W measures what workers with modest incomes pay on average for retail goods.
The COLA for 2021 benefits, compared with a 1.6% adjustment for 2020.
When the CPI-W increases by more than 0.1% between the third quarter of the previous year and the third quarter of the current year, the Social Security Administration adds a COLA to Social Security benefits. Benefits increase by the same amount as the index. During years when the CPI-W increase is nominal or negative, Social Security recipients receive no COLA.
The Social Security Administration typically announces the COLA in October for changes that will take effect in the following year. For 2021, beneficiaries will receive a 1.3% COLA hike. There was a 1.6% increase in 2020. The 2.8% increase in 2019 was the highest since 2012, when benefits increased by 3.6%. In 2018, the COLA was 2%, and in 2017 it was 0.3%. There was no increase in 2016.
Notably, the COLA reached a record high of 14.3% in 1980, when the inflation rate was 13.5%.