Social Security benefits are adjusted for inflation. This adjustment is known as the cost-of-living adjustment (COLA). For the program's initial four decades, benefit amounts did not increase based on higher living costs. However, the high rates of inflation from the 1970s – which was particularly hard on seniors with fixed incomes – prompted the Social Security Administration (SSA) to modify the program so inflation would trigger increases in benefit amounts.
How the Cost-of-Living Adjustment Got Started
The SSA 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.
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 make a living.
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). This index measures what workers with modest incomes pay on average for retail goods.
When the CPI-W increases by more than 0.1 percent from one year to the next, the SSA makes a COLA to the Social Security program. During years when the CPI-W increase is nominal or negative, Social Security recipients receive no COLA.
On Dec. 31, 2018, more than 67 million Social Security beneficiaries start receiving a 2019 cost-of-living adjustment of 2.5% over their 2018 benefit amounts.