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 accordingly. During years when the CPI-W increase is nominal or negative, Social Security recipients receive no COLA.

On Jan. 1, 2018, more than 61 million Social Security beneficiaries received a cost of living adjustment of two percent over their 2017 benefit amounts.

  1. How does a cost-of-living adjustment (COLA) affect my salary?

    Learn how employers add cost-of-living adjustments to workers' salaries to offset the effects of inflation or aid in a relocation ... Read Answer >>
  2. Can I collect Social Security if I still have a job?

    Find out about some circumstances that would allow you to collect Social Security while you're working and how your benefits ... Read Answer >>
Related Articles
  1. Retirement

    How Social Security COLAs Are Calculated

    An overview of Social Security cost of living adjustments (COLAs) and how they are calculated.
  2. Retirement

    COLA Increases Social Security Benefits in 2018

    Social Security retirement benefit recipients are enjoying a cost of living adjustment increase in their benefits this year.
  3. Retirement

    Top 6 Myths About Social Security Benefits

    Misinformation on retirement benefits is common. We'll set the record straight.
  4. Taxes

    How Fixed Income Threshold Reduces Social Security Benefits

    The use of fixed income threshold amounts to an ongoing tax increase and a means test on Social Security beneficiaries. Here's how.
  5. Retirement

    5 Tips to Increase Your Social Security Check

    These planning tips could increase your Social Security income benefits, which can significantly enhance your financial security.
  6. Retirement

    How Working After Retirement Affects Social Security

    Working after retirement can positively affect your Social Security benefits.
  7. Retirement

    How Social Security Will Change In 2015

    The average retiree’s check will rise by 1.7% in 2015, the Social Security Administration says. And the ceiling on taxable earnings will rise, as well.
  8. Retirement

    Is Your Social Security Check Less Than You Thought?

    If you're counting on your Social Security check to cover financial gaps in retirement, you may be in for a shock if your benefits are less than expected.
  9. Retirement

    403(b) Plans: More Than Supplemental Retirement

    Whether you choose a 403(b) or fixed annuity, you may need supplemental retirement income.
  10. Tech

    'First Crypto Analyst' Warns Against Bitcoin

    Calling bitcoin the 'FANG stock of the crypto world,' but recommending investors avoid it.
  1. Consumer Price Index For Urban Wage Earners And Clerical Workers (CPI-W)

    The Consumer Price Index for Urban Wage Earners and Clerical ...
  2. Indexed Earnings

    Indexed earnings is a calculation the Social Security Administration ...
  3. Social Security Benefits

    Social security benefits are funds paid to retired workers who ...
  4. Social Security Trust Fund

    The Social Security Trust Fund refers to two accounts used by ...
  5. Consumer Price Index - CPI

    The Consumer Price Index examines the weighted average of prices ...
  6. Death Master File (DMF)

    The Social Security Administration maintains the Death Master ...
Trading Center