We are all affected by inflation as the cost of goods and services continues to rise. Many people on Social Security benefits have a hard time keeping up with the cost of living. This is especially true for retirees and disability benefit recipients who live on a fixed income. The purchasing power of a dollar becomes less and less, so what is someone to do who relies on these benefits to survive? Thankfully, the Social Security Administration recognized this fact in the 1970’s. They now provide an annual cost of living adjustment to help keep up with rising inflation. So, just how does this COLA work and how will it affect your benefits? Keep reading to learn the details!
What Is The Cost-Of-Living Adjustment (COLA)?
So, what is COLA? The COLA is the annual benefit increase that recipients of Social Security and Supplemental Security Income (SSI) receive. This annual increase is meant to help the benefit payments keep up with inflation. As inflation rises, the cost of goods goes up. This means that you can buy fewer items with the same amount of money. Therefore, the COLA increase is needed to help maintain the same level of buying power for your benefits.
Cost of living allowances are based on the CPI or Consumer Price Index. Each year, the Bureau of Labor Statistics (BLS) calculates the CPI-W, also known as the consumer price index for urban wage earners and clerical workers. This serves as a guide for how much prices have increased during the current year. Once the Department of Labor calculates this number, it is then used to calculate the COLA for the year. The adjustments are usually equal to the CPI-W for the year. So, if the CPI-W is calculated at 2.5% for the year, then Social Security beneficiaries will usually see a 2.5% increase in their retirement benefits that year. Without these increases, many people would be left wondering how much they could earn while on Social Security and might find themselves working another job while receiving benefits just to make ends meet.
History Of The COLA
Prior to 1975, there were no automatic COLA increases for Social Security benefits. However, the 1970’s saw high inflation and interest rates. Traditionally, Congress needed to approve benefit increases through special legislation. Seeing a need for regular increases, Congress passed a special Social Security COLA provision. This provided for automatic increases to benefit amounts each year based on the CPI-W calculated by the U.S. Bureau of Labor Statistics. Since 1983, the CPI-W has been calculated from the third quarter of the previous year to the third quarter of the current year. That percent increase is then applied to the benefits for Social Security recipients.
The 1970’s and 1980’s saw large percentage increases in benefits due to very high inflation. In fact, in 1980, benefit recipients saw the largest COLA in history at 14.3%. The cost of living increase has been much more modest since the 1990’s. With inflation slowing down, the increases have only averaged 2-3% per year. During some years in the 2000’s, there was no COLA at all because inflation was very close to zero.
Cost-Of-Living Increases For Social Security Benefits
Social Security recipients have become accustomed to their cost of living raises based on the current cost of living index. So, let’s take a look at a quick example. Suppose you are receiving $20,000 per year in Social Security retirement benefits. Also suppose that inflation last year was calculated at 2.0% based on the CPI-W. This means that you would see a 2% increase in your benefits during the current year. So, you would essentially get a raise from $20,000 per year to $24,000 per year.
So, what happens when deflation occurs? If the consumer price index drops or remains unchanged, then there is no COLA increase. In some cases, this can still hurt some recipients in areas like New York where real estate is extremely expensive. Even though consumer good prices might remain unchanged, the cost of living may still increase for some people.
Healthcare costs are another big consideration. In years where there is no COLA increase, Medicare premiums remain the same for people who have their premiums deducted automatically from their Social Security benefits. For other Medicare enrollees, there may be an increase in premiums.
Other Cost-Of-Living Raises
The Social Security cost of living increase is not the only one out there. The military often makes adjustments to pay based on cost of living as well. This is especially common when the military service member must complete an assignment in a geographic area with a much higher cost of living. The pay will generally be adjusted back to normal once the assignment is completed. Similarly, the Social Security tax limit gets adjusted upward almost every year as well.
Many private employers offer similar adjustments. Some private employers even have different salary ranges for their jobs based on geographic location. For example, someone in New York may be paid more to perform the same job than someone in Dallas, TX. This is due to the much higher cost of living in New York.
The Bottom Line
As the cost of living increases, Social Security benefits must also increase to keep up with inflation. Since 1975, a COLA increase is automatic in each year in which the consumer price index goes up. In years where prices fall, there is no increase in benefits. Not only do Social Security recipients see these increases, but military members can see them in some situations as well. In addition, some private employers might offer a COLA for employees living in certain areas. Calculation of your increase is quite simple. Simply use the CPI-W and increase your benefits by the same amount.
Frequently Asked Questions
Is there a cost of living increase for 2021?
Yes, there is a cost of living increase for Social Security in 2021. The COLA in 2021 is equal to 1.3% The COLA for 2020 was 1.6%. Though we do not know what the increase for 2022 will be yet, it appears that it might be slightly larger than recent years. The prices of goods have increased quite quickly throughout 2021, so the COLA for 2022 will likely reflect this uptick in inflation.
How much does the cost of living go up each year?
It varies from year to year. It is based on the CPI-W calculated by the Department of Labor. In some years, there is no increase at all. In other years, the increase may be higher. During the 1970’s and 1980’s, the increases were very high. They commonly exceeded 10%. However, in recent years, the increases have been much more modest in the 2-3% range.
Will I get a COLA increase each year for my Social Security benefits?
Each year that the consumer price index rises, you will get a COLA increase for your benefits. Congress authorized this annual increase back in 1975. In years when the consumer price index either falls or remains the same, there will be no COLA increase. While that is not extremely common, it does happen from time to time.
Can a cost-of-living adjustment cause my benefits to decrease?
No, the COLA will not cause your benefits to decrease. In some years, it is possible that the consumer price index might fall. However, this does not mean that your benefits will decrease. It simply means that there will be no increase to your benefits in that year. Rest assured that you will continue to receive the same amount of benefits that you did the previous year.