What is the cost of living adjustment (COLA)

Cost of living adjustment (COLA) is a change in the monthly benefit amount to counter the effects of inflation every year. This Social Security policy was implemented in the US in 1975 to cushion retirees’ income from rising inflation.

COLA is exclusive to the US, although other countries have implemented various strategies to curb the effect of inflation using subsidies and other federal policies. For instance, France has capped the price of energy, and Germany offers its citizens a one-off payment to help with the cost of living.

What is the purpose of a cost of living adjustment?

The Cost of Living Adjustment was enacted in response to high inflation in the 1970s. COLA ensures that inflation does not reduce the purchasing power of Social Security and Supplemental Social Income (SSI) beneficiaries.

Although it’s normal for most economies to experience some level of inflation, high inflation reduces the value of pensions and savings and those on fixed incomes.

As the cost of goods and services increases, employees and retirees need to receive higher social security payments to maintain their lifestyles.

How does the cost of living adjustment work in the US?

Cost of living adjustments may vary depending on the organization that pays monthly pensions. However, the Social Security COLA is a standard benchmark for determining the COLA benefits to retirees.

Social Security cost of living adjustments are based on the third quarter average of the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). 

The U.S. Bureau of Labor Statistics (BLS) determines the CPI-W, which is the official measure used by the Social Security Administration (SSA) to estimate COLAs.

The CPI-W measures the price change in a defined basket of goods and services. These are:

• Foods and beverages (dairy products, meat, snacks, and full-service meals)
• Housing (rent or similar costs for owners, heating and cooling, furniture)
• Clothing and apparel (dresses, pants, sweaters)
• Healthcare (prescription drugs, medical supplies, hospital and doctor services)
• Transportation (new car costs, airfare, gas, car insurance)
• Recreation (TVs, toys, pet products)
• Education and communication (computer services, phone services, school tuition)
• Other goods and services, such as personal services

Benefits increase to correspond with an increase in the CPI-W if there is one. If there is no increase in CPI-W or if the increase rounds to zero, there is no COLA for the following year.

Social Security COLAs can be used to measure the rate of inflation since they are based on the CPI-W. 

However, the use of CPI-W to calculate Social Security benefits has come under scrutiny for several reasons. 

Seniors spend more of their income on housing and healthcare than younger workers, who may allocate more for recreation, clothing, or education. The CPI-W has been flagged for putting more weight on categories that seniors don’t spend heavily.

How much is the US COLA adjustment for 2022?

At the beginning of 2022, COLA benefits increased to 5.9%, representing the largest increase in the last forty years. About 70 million Americans received this adjustment, providing the average recipient a boost of $93. 

This increase resulted from high inflation in the second half of 2021. Prices continue to rise even faster, and experts forecast a bigger growth of about 9 -10% in COLA benefits for 2023.

Social Security COLA notices are available to most beneficiaries in my Social Security Account Message Centre.

Does everyone in the US get the COLA increase?

Social Security recipients, such as those entitled to old age retirement benefits, disability benefits, and survivors, receive the COLA. Recipients of Supplemental Security Income are eligible for COLA in a given year. 

Since December 2021, the COLA program has included veteran benefits. There are other COLAs besides the Social Security COLA. Employers may offer these on a temporary basis. 

For instance, the US military occasionally gives a temporary COLA to its employees in cities with higher living costs. The COLA expires once the work assignment is complete.

How do you calculate your COLA increase in the US?

To calculate your COLA amount, multiply your monthly payment by the current rate (5.9% in 2022) to get the increase. Then, add this number to the amount you received the previous year to get what you should expect in 2022.

The annual COLA becomes effective every December of the current year if there’s a COLA. The first increase in Social Security payouts from the COLA begins in January next year. So the COLA for 2023 becomes effective in December 2022.