A cost-of-living adjustment (COLA) is a purchasing-power protection mechanism provided to all monthly Social Security and Supplemental Security Income benefits. While a cost-of-living raise for Social Security recipients is technically "mandatory," it does not mean there will be an actual increase every year: 2015 was one year when there wasn't a raise, for example.
By law, the Social Security Administration must provide a cost-of-living increase proportionate to the percentage increase in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). The CPI-W is calculated by the U.S. Bureau of Labor Statistics, which operates within the Department of Labor. Those receiving Social Security and Supplemental Security Income do not need to request or apply for COLA benefits to receive them.
History of the Cost-of-living Adjustment
Even though Social Security was enacted in 1935, there were no adjustments made for inflation until 1950, when Congress recomputed the benefits for current recipients. A second recalculation was enacted in 1952, and by that time, it had effectively doubled the benefit available to recipients. There were subsequent increases in 1954, 1959, 1965, 1968, and each year from 1970 to 1972.
Social Security beneficiaries began receiving COLAs in 1972 when the U.S. Congress passed the Social Security Amendments. It was not until three years later that an automatic annual COLA mechanism was instituted. These automatic increases were accompanied by automatic increases in the earnings subject to Social Security taxes.
By 1977, the Social Security Administration believed the increases were too large and that the program would face a funding shortfall at current rates. Congress passed additional amendments that same year to reduce benefits. Beneficiaries received their cost-of-living benefit increases in July until 1982 when the law changed to have Social Security COLA payable in December and received in January. When the cost of living declines, recipients can expect no COLA increase the following year, as happened in 2016; this also happened in 2010 and 2011. The 2019 COLA was 2.8%, and the COLA for 2020 is 1.6%.
Calculation of the Cost-of-living Adjustment
The CPI-W is based on the expenditures of households that fall under the definition of "Urban Wage Earners" or "Clerical Workers" who, as of Nov. 2019, represent about 29% of the U.S. population. When the Consumer Price Index is reported, it is likely a reference to the CPI-U, or Consumer Price Index for All Urban Consumers, and not the CPI-W. The CPI-U incorporates the CPI-W but is ultimately a different measurement.
In general, the CPI-W is weighted more heavily towards goods and services like food, transportation, clothes, and other day-to-day expenses. Items like housing, medical care, and entertainment receive less weight. If the prices for the goods and services that comprise the CPI-W see an increase of 2.5% over the prior year, the following COLA for Social Security benefits sees a corresponding 2.5% increase. However, if the CPI-W increases by less than 0.05%, or it decreases, otherwise referred to as deflation, Social Security benefits do not include a cost-of-living raise.