The Social Security Cost-of-Living Adjustment (COLA) enacted in 1973 is a crucial way the U.S government ensures that social security benefits continue to be relevant to beneficiaries especially during inflation. To make this possible, every year, the Social Security Administration (SSA) adjusts the amount of benefits paid to eligible individuals to align with the cost of living. With COLA individuals and families who receive social security benefits can still maintain their cost of living despite changes in the economy.
What is the Social Security COLA?
The COLA is an annual adjustment applied to Social Security and Supplemental Security Income (SSI) benefits by the SSA to curb the effect of inflation. The primary objective of COLA is to ensure that the amount paid by the SSA to individuals as social security remains valuable regardless of any economic situation. So beneficiaries such as retirees and disabled individuals can continue to rely on these payments even during inflation.
How is COLA calculated?
COLA is calculated based on the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) which measures the average change in the prices of goods and services consumed by workers at a given period of time. The SSA incorporates current rate of inflation into this calculation, here are the steps:
- Comparison Period: The SSA uses statistics from the third quarter (July, August, and September) of the current year to compare to the same period in the previous year. So that basically means that statistics from July this year can be used to compare with that of July, last year.
- Percentage Change: To calculate this, the CPI-W for the third quarter, for instance September, of last year is compared with that of the third quarter of the current year. If there is any noticeable increase based on the results, that percentage becomes the COLA for the next year. According to the SSA, the latest COLA is 3.2% for social security benefits.
- Application of COLA: If after calculating the percentage change, there is no increase, social security benefits for the next year remain the same. However, note that there can not be any deductions in your benefits as a result of COLA.
Factors That Influence COLA Adjustments
There are several facts that are considered by the SSA before COLA adjustments takes effects and they include:
- Inflation rates: The primary reason for the enactment of COLA is inflation. When the Inflation rate is high across the U.S., COLA rates are also increased to maintain the purchasing power of social security beneficiaries, allowing them to still purchase their daily essentials such as food, healthcare, housing and transportation.
- Economic conditions: Generally, the U.S economic condition, employment rate and the changes in the demands of consumers can negatively affect inflation rates impacting COLA.
- Energy and food prices: The cost of food and gasoline can heavily influence the CPI-W. When the price of gasoline increases, for example,it can lead to high cost of transportation and manufacturing, which ripple through the economy and contribute to overall inflation.
- Healthcare costs: For many social security beneficiaries such as retirees, seniors and those with disability, healthcare is a major concern. Health care costs like those for prescription drugs, insurance premiums and other medical services which can affect your CPI-W and subsequently your COLA is taken into consideration.
