What Is a Cost-of-Living Adjustment (COLA)?
A cost-of-living adjustment (COLA) is an increase made to Social Security benefits and Supplemental Security Income (SSI) to counteract the effects of inflation and rising prices in the economy.
COLAs are typicallyequal to the percentage increase in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) for a specific period. The Consumer Price Index (CPI) represents the average prices of a basket of goods and is used to measure inflation.
The COLA was 8.7% for 2023 so their annual benefit would increase to $10,870 if someone received $10,000 in Social Security benefits in 2022. The COLA is just 3.2% for 2024. Someone who received $10,000 in Social Security benefits in 2023 would see their 2024 annual benefit increase to $10,320.
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.
Understanding the Cost-of-Living Adjustment (COLA)
Inflation was high during the 1970s so compensation-related contracts, real estate contracts, and government benefits used COLAs to protect against inflation. The U.S. Bureau of Labor Statistics (BLS) determines the CPI-W that the Social Security Administration (SSA) uses to compute COLAs. The formula applies the percentage increase in the CPI-W from the third quarter of one year to the third quarter of the following year. This information is updated regularly on the SSA website.
Congress ratified a COLA provision to offer automatic yearly COLAs based on the annual increase in the CPI-W that went into effect in 1975. Social Security benefits were increased when Congress approved special legislation before 1975. COLAs were based on the increase in the CPI-W from the second quarter of 1974 to the first quarter of 1975 in that year.
They were based on the increases in the CPI-W from the first quarter of the previous year to the first quarter of the current year from 1976 to 1983. COLAs have been dependent on the CPI-W from the third quarter of the previous year to the third quarter of the current year since 1983.
Inflation levels rangedfrom 3.3% to 11.3% in the 1970s. The COLA increase was 8% and the inflation rate was 9.1% in 1975.
The COLA reached the highest level in history at 14.3% in 1980 when the inflation rate was 13.5%.
Drastically lower inflation rates prompted small COLA increases averaging 2% to 3% per year during the 1990s. That continued into the early 2000s when even lower inflation rates resulted in no COLA increases at all in 2010, 2011,and 2016.
The COLA for 2023 was 8.7%, up from 5.9% in 2022 and 1.3% in 2021 due to the high inflation levels witnessed in 2022. Inflation was 8% that year. The COLA is 3.2% for 2024.
How COLA Is Determined
COLA is reliant on two components: the CPI-W and the employer-contracted COLA percentage. CPI determines the rate of inflation and is compared yearly. Recipients don't receive a COLA when consumer prices drop or if inflation hasn't been high enough to substantiate a COLA increase. There's no COLA increase if there's no CPI-W increase.
Hold-Harmless Provision
The hold-harmless provision in the Social Security Act prevents the benefit amount for some Social Security beneficiaries from decreasing from one year to the next if there's an increase in their standard Medicare Part B premiums. The Part B premium will be reduced to ensure that the nominal value of the Social Security benefit will be the same if the increase in Part B premiums causes the beneficiaries' Social Security amount to be less.
Few individuals are typically held harmless but they may be impacted by this provision in years where there's no Social Security COLA. There was a 2% Social Security COLA in 2018 and 28% of Part B enrollees were held harmless. There was virtually no COLA in 2016 and 70% of enrollees were held harmless from the Part B premium increase.
Other Types of COLAs
Some employers such as the U.S. military occasionally give a temporary COLA to employees who are required to perform work assignments in cities with a higher cost of living than their home city. This COLA expires when the work assignment is completed.
How Much Is the COLA Adjustment for 2024?
The COLA adjustment for 2024 is 3.2%. An individual's annual benefit would increase to $10,320 in 2024 if they received $10,000 in Social Security benefits in 2023.
How Do You Calculate Your COLA Increase for 2024?
Take your monthly payment and multiply it by 3.2% to calculate your COLA increase for 2024 then add this number to the amount you received in 2023. This will show you the amount you'll receive in 2024. You can do the same for 2025 when the COLA is announced for that year.
Does Everyone on Social Security Get the COLA Increase?
Yes, everyone on Social Security will get the COLA increase. The purpose of COLA is to ensure that benefits are not eroded because of inflation.
The Bottom Line
Social Security and Supplemental Security Income are both subject to cost-of-living increases. The idea is to provide an increase in benefits equal to the pace of inflation. The COLA increase for 2024 is 3.2%, plunging from 8.7% in 2022. There was no adjustment in 2009, 2010, or 2015.
