What Is a Cost-of-Living Adjustment (COLA) and How Does It Work?
Let me explain what a cost-of-living adjustment, or COLA, really is. It's an increase applied to your Social Security benefits and Supplemental Security Income (SSI) to counter the effects of inflation and rising prices in the economy. These adjustments are typically set equal to the percentage increase in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) over a specific period. The CPI tracks average prices of a basket of goods and serves as a measure of inflation.
For 2024, the COLA was 3.2%. If you received $10,000 in Social Security benefits in 2023, your 2024 annual benefit would rise to $10,320. Looking ahead, the COLA for 2025 is 2.5%, so if you got $10,000 in 2024 benefits, you'd see $10,250 the next year.
Understanding the Cost-of-Living Adjustment (COLA)
You need to understand that inflation was particularly high in the 1970s, which is why compensation contracts, real estate deals, and government benefits started incorporating COLAs to protect against it. The U.S. Bureau of Labor Statistics determines the CPI-W, and the Social Security Administration uses it to calculate these adjustments. The formula takes the percentage increase in the CPI-W from the third quarter of one year to the third quarter of the next.
Congress made automatic yearly COLAs official in 1975, based on the annual CPI-W increase. Before that, benefits only increased through special legislation. From 1976 to 1983, COLAs relied on CPI-W changes from the first quarter of the prior year to the current year's first quarter. Since 1983, it's been from the third quarter of the prior year to the current year's third quarter.
In the 1970s, inflation ranged from 3.3% to 11.3%, with a COLA of 8% in 1975 against 9.1% inflation. The highest COLA ever was 14.3% in 1980, when inflation hit 13.5%. The 1990s saw smaller increases of 2% to 3% per year due to lower inflation, and there were no COLAs in 2010, 2011, and 2016. More recently, 2023 had an 8.7% COLA due to 8% inflation in 2022, dropping to 3.2% in 2024 and 2.5% for 2025.
How COLA Is Determined
COLA depends on two main elements: the CPI-W and any employer-contracted COLA percentage. We compare the CPI yearly to gauge inflation. If consumer prices drop or inflation isn't sufficient, you won't get a COLA. No CPI-W increase means no COLA adjustment.
Hold-Harmless Provision
The hold-harmless provision in the Social Security Act ensures that for some beneficiaries, benefits don't decrease year-over-year if Medicare Part B premiums rise. If the premium hike would reduce your Social Security amount, the premium gets adjusted down to keep your benefit's nominal value steady. This affects few people usually, but in no-COLA years, it can impact more. For example, in 2018 with a 2% COLA, 28% of Part B enrollees were held harmless, and in 2016 with virtually no COLA, 70% were protected.
Other Types of COLAs
Beyond Social Security, some employers like the U.S. military provide temporary COLAs to workers assigned to higher-cost cities than their home base. This type ends when the assignment finishes.
Frequently Asked Questions
You might wonder how much the COLA is for 2025—it's 2.5%. If you had $10,000 in benefits in 2024, that becomes $10,250 in 2025. To calculate your own increase, multiply your monthly payment by 0.025 and add it to your 2024 amount. Yes, everyone on Social Security gets the COLA; it's designed to prevent inflation from eroding benefits.
The Bottom Line
In summary, both Social Security and Supplemental Security Income receive cost-of-living increases to match inflation's pace. The 2025 COLA is 2.5%, a significant drop from 8.7% in 2023, and there were no adjustments in years like 2009, 2010, and 2015.
Key Takeaways
- A cost-of-living adjustment (COLA) is an increase in Social Security benefits intended 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 is 3.2% for 2024, and 2.5% for 2025.
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