Cost-of-Living Adjustment (COLA)

What Is a Cost-of-Living Adjustment (COLA)?

A cost-of-living adjustment (COLA) is an increase made to Social Security and Supplemental Security Income (SSI) to counteract the effects of rising prices in the economy—called inflation.

COLAs are typically equal to the percentage increase in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) for a specific period. The Consumer Price Index (CPI) represents the average prices of a basket of goods and is used to measure inflation.

The COLA for 2022 is 5.9%, meaning for someone who received $10,000 in Social Security benefits in 2021, their 2022 annual benefit would total $10,590.

Key Takeaways

  • A cost-of-living adjustment (COLA) is an increase in Social Security benefits to counteract inflation.
  • Inflation is measured using the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W).
  • Automatic yearly COLAs began in 1975.
  • The COLA for 2022 is 5.9%.
1:45

Click Play to Learn About Cost-of-Living Adjustments (COLAs)

Understanding Cost-of-Living Adjustment (COLA)

Because inflation was high during the 1970s, compensation-related contracts, real estate contracts, and government benefits used COLAs to protect against inflation. The U.S. Bureau of Labor Statistics (BLS) determines the CPI-W, which the Social Security Administration (SSA) uses to compute COLAs. The COLA formula is determined by applying the percentage increase in the CPI-W from the third quarter of one year to the third quarter of the following year. This information is updated regularly on the SSA website.

Congress ratified a COLA provision to offer automatic yearly COLAs based on the annual increase in the CPI-W that went into effect in 1975. Before 1975, Social Security benefits were increased when Congress approved special legislation. In 1975, COLAs were based on the increase in the CPI-W from the second quarter of 1974 to the first quarter of 1975. From 1976 to 1983, COLAs were based on the increases in the CPI-W from the first quarter of the previous year to the first quarter of the current year. Since 1983, COLAs have been dependent on the CPI-W from the third quarter of the previous year to the third quarter of the current year.

COLAs depend on the CPI-W from the third quarter of the previous year to the third quarter of the current year.

Inflation levels ranged from 3.3% to 11.3% in the 1970s. In 1975, the COLA increase was 8%, and the inflation rate was 9.1%. In 1980, the COLA reached the highest level in history at 14.3%, while the inflation rate was 13.5%. During the 1990s, drastically lower inflation rates prompted small COLA increases averaging 2% to 3% per year. That continued into the early 2000s, when even lower inflation rates resulted in no COLA increases in 2010, 2011, and 2016. The COLA for 2022 is 5.9%, up from 1.3% in 2021.

Special Considerations

COLA is reliant on two components: the CPI-W and the employer-contracted COLA percentage. CPI determines the rate of inflation and is compared yearly. When consumer prices drop—or if inflation has not been high enough to substantiate a COLA increase—recipients do not receive a COLA. If there is no CPI-W increase, then there is no COLA increase.

When a COLA increase is not approved, Medicare Part B premiums remain the same for approximately 70% of beneficiaries who get the premiums deducted from their Social Security checks. However, the remaining recipients—those with higher incomes, those who did not participate in Social Security through their employer, and new beneficiaries—must pay the Medicare Part B premium increases.

The standard monthly Medicare Part B premium set for 2021 is $148.50, but the premium rises to $170.10 in 2022—an increase of $21.60 from 2021.

Other Types of COLAs

Some employers, such as the U.S. military, occasionally give a temporary COLA to employees who are required to perform work assignments in cities with a higher cost of living than their home city. This COLA expires when the work assignment is finished.

Article Sources

Investopedia requires writers to use primary sources to support their work. These include white papers, government data, original reporting, and interviews with industry experts. We also reference original research from other reputable publishers where appropriate. You can learn more about the standards we follow in producing accurate, unbiased content in our editorial policy.
  1. Social Security Administration. “Latest Cost-of-Living Adjustment.” Accessed Dec. 5, 2021.

  2. Social Security Administration. “Cost-of-Living Adjustment (COLA) Information for 2022.” Accessed Dec. 5, 2021.

  3. Social Security Administration. “Cost-of-Living Adjustment Must Be Greater Than Zero.” Accessed Dec. 5, 2021.

  4. Social Security Administration. “Cost-of-Living Adjustments.” Accessed Dec. 5, 2021.

  5. Federal Reserve Bank of Minneapolis. “Consumer Price Index, 1913–.” Accessed Dec. 5, 2021.

  6. Congressional Research Service. “The Interaction Between Medicare Premiums and Social Security COLAs,” Page 16. Accessed Dec. 5, 2021.

  7. Centers for Medicare & Medicaid Services. “Fact Sheet: 2022 Medicare Parts A & B Premiums and Deductibles/2022 Medicare Part D Income-Related Monthly Adjustment Amounts.” Accessed Dec. 5, 2021.

  8. U.S. Department of Defense. “Volume 7A, Chapter 68: “Cost of Living Allowance Outside the Continental United States (OCONUS COLA) and Temporary Lodging Allowance (TLA)”,” Page 68-4. Accessed Dec. 5, 2021.

Take the Next Step to Invest
×
The offers that appear in this table are from partnerships from which Investopedia receives compensation. This compensation may impact how and where listings appear. Investopedia does not include all offers available in the marketplace.
Service
Name
Description