A cost-of-living adjustment (COLA) is a purchasing-power protection mechanism provided to all monthly Social Security and Supplemental Security Income benefits. While a cost-of-living raise for Social Security recipients is technically “mandatory,” it does not mean there will be an actual increase every year: 2016 was one year when there wasn’t a raise, for example.
By law, the Social Security Administration must provide a cost-of-living increase proportionate to the percentage increase in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). The CPI-W is calculated by the U.S. Bureau of Labor Statistics, which operates within the Department of Labor. Those receiving Social Security and Supplemental Security Income do not need to request or apply for COLA benefits to receive them.
The cost-of-living adjustment (COLA) is not required, and in some years there is no increase in the COLA.
When the cost of living declines, recipients can expect no COLA increase the following year.
There have been three years when there has been no COLA increase since 2010, including the years 2010, 2011, and 2016.
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History of the Cost-of-Living Adjustment
Even though Social Security was enacted in 1935, there were no adjustments made for inflation until 1950, when Congress recomputed the benefits for current recipients. A second recalculation was enacted in 1952, and by that time, it had effectively doubled the benefit available to recipients. There were subsequent increases in 1954, 1959, 1965, and each year from 1970 to 1972.
Social Security beneficiaries began receiving COLAs in 1972 when the U.S. Congress passed the Social Security Amendments. It was not until three years later that an automatic annual COLA mechanism was instituted. These automatic increases were accompanied by automatic increases in the earnings subject to Social Security taxes.
By 1977, the Social Security Administration believed the increases were too large and that the program would face a funding shortfall at current rates. Congress passed additional amendments that same year to reduce benefits. Beneficiaries received their cost-of-living benefit increases in July until 1982 when the law changed to have Social Security COLA payable in December and received in January.
When the cost of living declines, recipients can expect no COLA increase the following year, as happened in 2016; this also happened in 2010 and 2011. The 2021 COLA was 1.3%, the COLA for 2022 is 5.9%, and the COLA for 2023 will be 8.7%.
Calculation of the Cost-of-Living Adjustment
The CPI-W is based on the expenditures of households that fall under the definition of “Urban Wage Earners” or “Clerical Workers” who, as of October 2022, represent about 29% of the U.S. population.
When the Consumer Price Index is reported, it is likely a reference to the CPI-U, or Consumer Price Index for All Urban Consumers, and not the CPI-W. The CPI-U incorporates the CPI-W but is ultimately a different measurement.
In general, the CPI-W is weighted more heavily towards goods and services like food, transportation, clothes, and housing. Items like recreation, education, and communication receive less weight.
If the prices for the goods and services that comprise the CPI-W see an increase of 0.1% over the prior year, the following COLA for Social Security benefits also sees an increase. However, if the CPI-W increases by less than 0.05%, or it decreases, otherwise referred to as deflation, Social Security benefits do not include a cost-of-living raise.
What Is the COLA Increase for 2022?
The COLA increase for 2022 is 5.9%. This means that seniors will receive 5.9% more in Social Security benefits than the year prior to take into account inflation. The COLA increase for 2023 will be 8.7%.
How Is the Cost-of-Living Adjustment Calculated?
The cost-of-living adjustment (COLA) is calculated when the U.S. Department of Labor calculates the Consumer Price Index (CPI) “from the third quarter average of the previous year to the third quarter average for the current year.” The CPI is then used to calculate the COLA based on different factors.
Are COLA Raises Mandatory?
No, COLA raises are not mandatory, and not every year has seen a COLA. COLA raises happen only in relation to changes in the CPI-W, based on certain levels.
The Bottom Line
Inflation is a normal characteristic of a healthy economy. When inflation is too high, it erodes the value of people’s income and savings. To prevent inflation from significantly eroding the value of Social Security benefits for retirees, the government adjusts the amount of benefits, known as cost-of-living adjustments (COLA). COLAs are not mandatory and do not occur every year.