A cost-of-living adjustment (COLA) is an increase in Social Security and Supplemental Security Income (SSI) designed to combat rising prices in the economy due to inflation.
COLAs are generally equivalent to the percentage rise in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) for a specific period. The Consumer Price Index (CPI), which represents the average prices of a basket of goods, is used to gauge inflation levels.
For 2023, the COLA was 8.7%. If someone received $10,000 in Social Security benefits in 2022, their 2023 annual benefit would total $10,870. For 2024, the COLA is set at 3.2%, making the annual benefit $10,320 for someone who received $10,000 in 2023.
Key Takeaways
- A cost-of-living adjustment (COLA) is an increment in Social Security benefits to counteract inflation.
- Inflation is gauged using the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W).
- Automatic yearly COLAs have been in place since 1975.
- The COLA for 2023 was 8.7%, and for 2024 it is 3.2%.
Understanding the Cost-of-Living Adjustment (COLA)
Because inflation was high in the 1970s, many compensation-related contracts, real estate agreements, and government benefits incorporated COLAs to safeguard against inflation. The U.S. Bureau of Labor Statistics (BLS) determines the CPI-W, which the Social Security Administration (SSA) relies on to compute COLAs. The formula requires the percentage increase in the CPI-W from the third quarter of one year to the third quarter of the next.
Congress ratified a COLA provision in 1975 that offered automatic yearly COLAs based on annual CPI-W increases. Before this provision, Social Security benefits were only increased when Congress passed special legislation. Inflation levels fluctuated significantly over the years, but COLA increases became a standard annual adjustment.
During the 1970s, inflation levels ranged from 3.3% to 11.3%, prompting substantial COLA increases. In 1980, the COLA surge hit a peak of 14.3%. Conversely, in the 1990s and early 2000s, lower inflation rates led to smaller COLA increments, averaging 2% to 3%. Unfortunately, there was no COLA increase in years with exceptionally low inflation rates, such as 2010, 2011, and 2016.
In recent years, inflation levels have once again risen, causing significant COLA adjustments. For instance, in 2023, a COLA of 8.7% was implemented due to the previous year’s high inflation of 8%. For 2024, a COLA of 3.2% is set.
How COLA Is Determined
COLA depends on two elements: the CPI-W and the contracted COLA percentage by the employer. If consumer prices decline or inflation isn’t sufficient to warrant a COLA, recipients do not receive an increment.
Hold-Harmless Provision
The hold-harmless provision within the Social Security Act ensures that some beneficiaries’ payments do not decrease if their Medicare Part B premiums increase. If Part B premium hikes cause a beneficiary’s Social Security payment to drop, the premium will be reduced to keep the nominal value of the Social Security benefit unchanged. This provision impacts more individuals when there is no Social Security COLA, such as in 2016, compared to other years when there was a minor COLA.
Other Types of COLAs
Some employers, including the U.S. military, occasionally offer temporary COLAs to employees relocating to higher cost-of-living areas due to work assignments. These COLAs expire once the assignment concludes.
Highlights of COLA Adjustments for 2023 and 2024
For 2023, the adjustment was 8.7%, equal to an individual’s annual benefit increase from $10,000 in 2022 to $10,870. For 2024, the adjustment is 3.2%, upgrading the annual benefit to $10,320 for someone with a 2023 benefit of $10,000.
Calculating Your COLA Increase
To calculate your 2023 COLA increase, multiply your monthly payment by 8.7% and add this to your 2022 amount. For 2024, you would calculate a 3.2% increase over the 2023 total.
Universal Social Security Beneficiary Increase
All Social Security recipients receive a COLA increase to safeguard their benefits from being diminished by inflation.
The Bottom Line
Both Social Security and Supplemental Security Income benefits are adjusted to keep pace with inflation. The COLA for 2023 was 8.7%, and for 2024 it will be 3.2%, ensuring that beneficiaries’ income keeps up with the economic changes.
Related Terms: inflation, Consumer Price Index, Social Security benefits, CPI-W.
References
- Social Security Administration. “Latest Cost-of-Living Adjustment”.
- U.S. Bureau of Labor Statistics. “Consumer Price Index: Home”.
- Social Security Administration. “Cost-of-Living Adjustment (COLA) Information”.
- Social Security Administration. “Historical Background and Development of Social Security”.
- Social Security Administration. “Cost-of-Living Adjustment Must Be Greater Than Zero”.
- Social Security Administration. “Cost-of-Living Adjustments”.
- Federal Reserve Bank of St. Louis, FRED. “Inflation, Consumer Prices for the United States”.
- Congressional Research Service. “The Interaction Between Medicare Premiums and Social Security COLAs”, Page 11.
- 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.
