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 2023 is 8.7%, meaning for someone who received $10,000 in Social Security benefits in 2022, their 2023 annual benefit would total $10,870.
- 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 2023 is 8.7%.
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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.
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 2023 is 8.7%, up from 5.9% in 2022 and 1.3% in 2021.
How COLA Is Determined
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.
In the Social Security Act, the hold-harmless provision prevents some Social Security beneficiaries' benefit amount from decreasing from one year to the next if there is an increase in their standard Medicare Part B premiums. If the increase in Part B premiums causes the beneficiaries' Social Security amount to be less, then the Part B premium will be reduced to ensure the nominal value of the Social Security benefit will be the same.
Typically, few individuals are held harmless; however, in years where there is no Social Security COLA, more individuals may be impacted by this provision. In 2018, for example, there was a 2% Social Security COLA, and 28% of Part B enrollees were held harmless. In 2016, there was no COLA and 70% of enrollees were held harmless from the Part B premium increase.
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.
How Much Is the COLA Adjustment for 2022?
The COLA adjustment for 2022 is 5.9%. So for example, if an individual received $10,000 in Social Security benefits in 2021, their 2022 annual benefit would total $10,590.
How Do You Calculate Your COLA Increase for 2022?
To calculate your COLA increase for 2022, take your monthly payment and multiply it by 5.9%. This will tell you the increase. From there, add this number to the amount you were receiving in 2021. This will show you the new amount you will receive in 2022.
Does Everyone on Social Security Get the COLA Increase?
Yes, everyone on Social Security will get the COLA increase. The purpose of COLA is to ensure that benefits are not eroded because of inflation.