Social Security and Inflation (COLAs)
The Social Security cost-of-living adjustment (COLA) is a yearly adjustment calculated based on the rising prices of goods and services. The annual adjustment keeps your Social Security payment up to pace with inflation. COLA adjustments are typically announced in October and take effect after the start of the new year.
What Are Cost-Of-Living Adjustments (COLAs)?
The Social Security Administration (SSA) spends time annually evaluating the percentage by which it must adjust Social Security benefits to keep up with inflation. These COLAs appear as an additional amount added to your payments in the new year. The COLA for 2022 is 5.9%.
The annual adjustment doesn’t always perfectly match the rate of inflation, but it helps to close the gap and ensure that beneficiaries can continue to afford basic goods and services.
Because there is no set rate, COLAs will change each year. Percentages can fluctuate heavily because of years of high inflation. There have also been years with no adjustments at all when inflation wasn’t significant enough to warrant one — though this is fairly unusual and has only happened three times this century.
It’s important when receiving your COLA not to think of it as extra money or more than you were getting the year before, even though it appears that way on paper. The adjustment simply maintains the value of your Social Security benefit, raising it to match rising costs of goods and services and preserving its spending power.
How Are COLAs Calculated?
Calculating the COLA each year is a complex process. Since the adjustment is meant to combat inflation, it is based on the Consumer Price Index for Wage Earners and Clerical Workers (CPI-W).
According to the U.S. Bureau of Labor Statistics, the CPI-W is a monthly measure of the change in price that wage earners and clerical workers are paying for consumer goods and services. Essentially, it is a monthly snapshot of rising prices to gauge a sense of how much inflation has occurred.
The Social Security COLA is calculated based on the three months that make up the third quarter of the CPI-W. The COLA is equal to any increase from the third quarter of the past year to the current year. That increase is then rounded to the nearest tenth of 1%.
- The office gathers the CPI-W measurements from the third quarter.
- Officials compare those measurements to last year’s third quarter data.
- If there is an increase, they round the percentage to the nearest tenth of 1%.
- The resulting figure is used as the Social Security COLA.
If there is no increase from one third quarter’s data to the next, there will be no Social Security COLA for that year.
When Is the Social Security COLA Announced Annually?
The SSA typically announces upcoming COLAs in October of each year. The COLA for 2022 was announced on Oct. 13, 2021.
The adjustment takes effect a few months after the announcement at the start of the new year. This allows beneficiaries time to get a sense of what their new payment will be and how to budget for any changes, especially since other costs (like Medicare premiums) change yearly as well.
For example, the COLA in 2008 was a sizeable 5.8%. But the two following years saw no COLA at all. Having a few months’ notice before the adjustment takes effect can give you a chance to prepare for how your benefit will (or won’t) change in the coming year.
How Do COLAs Impact Social Security Payments?
COLAs naturally have a major impact on Social Security payments and play a large role in how much money Social Security beneficiaries receive over the year.
Adjustments are larger in years where there is more inflation, but it’s important to note that COLA adjustments don’t always do enough to entirely counteract inflation. This can cause your Social Security payments to have less spending power than they did the year prior.
But without any COLA, your payments would quickly lose their spending power since they would not keep up with the rate of inflation at all otherwise.
History of COLA Percentages
COLAs first began in 1975, and the yearly amount has varied heavily ever since depending on the state of the United States economy.
The adjustments have increased rapidly in recent years, rising from just 1.3% in 2020 to 5.9% in 2022, in part due to the effects of the COVID-19 pandemic. The 5.9% figure was the first to exceed 4% since 2009.
The highest COLA came in the early 1980s, when the rate exceeded 7% for four straight years. The single highest adjustment ever was 14.3% in 1980.
4 Cited Research Articles
- U.S. Bureau of Labor Statistics. (n.d.). CPI- Urban Wage Earners and Clerical Workers (Current Series). Retrieved from https://www.bls.gov/help/one_screen/cw.htm
- U.S. Social Security Administration. (n.d.). Cost-of-Living Adjustment (COLA) Information. Retrieved from https://www.ssa.gov/cola/
- U.S. Social Security Administration. (n.d.). Cost-of-Living Adjustments. Retrieved from https://www.ssa.gov/oact/cola/colaseries.html
- U.S. Social Security Administration. (n.d.). What is COLA? Retrieved from https://www.ssa.gov/oact/cola/latestCOLA.html