What Is a Cost-of-Living Adjustment COLA and How Does It Work
A Cost-of-Living Adjustment (COLA) is an increase in Social Security and Supplemental Security Income (SSI) benefits to counteract inflation. It is based on the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W), which measures the average prices of goods. The COLA for 2023 was 8.7%, and for 2024, it is 3.2%. COLAs began in 1975 and are updated regularly on the Social Security Administration (SSA) website.
In the 1970s, COLAs were introduced to protect against high inflation. The U.S. Bureau of Labor Statistics determines the CPI-W, and the SSA uses it to compute COLAs. Before 1975, Social Security benefits were increased through special legislation. From 1976 to 1983, COLAs were based on year-to-year increases in the CPI-W. Since 1983, COLAs have been dependent on the CPI-W from the previous to the current year.
In the 1970s, inflation levels ranged from 3.3% to 11.3%. The COLA increase in 1975 was 8%, and the highest increase in history occurred in 1980 at 14.3%. The inflation rate was 13.5% at that time. In the 1990s and early 2000s, lower inflation rates resulted in smaller COLA increases or no increases at all. The COLA for 2023 was 8.7%, up from 5.9% in 2022 and 1.3% in 2021. The inflation rate in 2022 was 8%. For 2024, the COLA is 3.2%.
The COLA is determined by the CPI-W and the employer-contracted COLA percentage. If there is no CPI-W increase, there is no COLA increase. The hold-harmless provision in the Social Security Act prevents Social Security beneficiaries’ benefits from decreasing due to an increase in Medicare Part B premiums.
Some employers, like the U.S. military, provide temporary COLAs to employees who work in cities with a higher cost of living. These COLAs expire after the work assignment is complete.
To calculate the COLA increase for 2023, multiply the monthly payment by 8.7% and add the result to the amount received in 2022. For 2024, multiply the 2023 numbers by 3.2%. Everyone on Social Security receives the COLA increase to prevent benefits from eroding due to inflation.
In conclusion, COLAs are designed to maintain the pace of inflation by providing cost-of-living increases in Social Security and Supplemental Security Income benefits. The COLA increase for 2023 was 8.7%, and for 2024, it is 3.2%.
