Inflation affects everyone as the cost of goods and services rises. Many people on Social Security benefits have difficulty keeping up with the cost of living, especially retirees and disability benefit recipients who live on a fixed income.
The purchasing power of a dollar becomes less and less, so how does someone who relies on these benefits 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, 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? COLA is the annual benefit increase that recipients of Social Security and Supplemental Security Income (SSI) receive. This increase helps the benefit payments keep up with inflation. As inflation rises, the cost of goods goes up. This means you can buy fewer items with the same amount of money. Therefore, the COLA increase is needed to help maintain the same level of purchasing power for your benefits.
Consumer Price Index
Cost-of-living allowances are based on the Consumer Price Index (CPI). The Bureau of Labor Statistics (BLS) calculates the CPI-W, also known as the consumer price index for urban wage earners and clerical workers, each year. This index serves as a guide for how much prices have increased during the current year.
Adjustments to Benefits
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 wonder how much they could earn while on Social Security. They might work another job while receiving benefits to make ends meet.
KEY TAKEAWAYS
- COLA stands for cost-of-living adjustment and is the annual benefit increase Social Security and SSI recipients receive.
- Annual automatic COLA increases began in the mid-1970s during a time of high inflation. It was established to help Social Security recipients offset the higher living costs.
- In 2025, the COLA increase is 2.5%, meaning a person who received $25,000 annually in 2024 will now get $25,625.
History Of The COLA
Before 1975, there were no automatic COLA increases for Social Security benefits. However, the 1970s saw high inflation and interest rates. Traditionally, Congress needed to approve benefit increases through special legislation. Congress saw a need for regular increases and passed a special Social Security COLA provision. This provided 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 previous year’s third quarter to the current year’s third quarter. That percent increase is then applied to the benefits for Social Security recipients.
Due to high inflation, benefits increased significantly in the 1970s and 1980s. Benefit recipients saw the largest COLA in history, at 14.3%, in 1980. However, the cost of living increase has been much more modest since the 1990s. With inflation slowing down, the increases have only averaged 2-3% yearly. During some years in the 2000s, there was no COLA because inflation was close to zero.
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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 you would see a 2% increase in your benefits this year. So, you would get a raise from $20,000 per year to $20,400 per year.
Deflation Situations
So, what happens when deflation occurs? If the consumer price index drops or remains unchanged, no COLA increase exists. This can still hurt recipients in areas like New York, where real estate is costly. Even though consumer goods prices might remain unchanged, the cost of living may still increase for some people.
Healthcare Costs
Healthcare costs are another significant consideration. In years with no COLA increase, Medicare premiums remain the same for people who deduct their premiums automatically from their Social Security benefits. However, premiums may increase for other Medicare enrollees.
TIP
When Congress established the COLA provision, deflationary periods were taken into account. So, if the consumer price index drops or remains unchanged, your Social Security benefits will never decrease.
Other Cost-Of-Living Raises
The Social Security cost-of-living increase is not the only one. The military often adjusts pay based on the cost of living as well. This is especially common when a military service member must complete an assignment in a geographic area with a much higher cost of living. Once the assignment is completed, pay will generally be adjusted back to normal. Similarly, the Social Security tax limit is adjusted upward almost every year.
Many private employers offer similar adjustments. Some 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, 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 each year the consumer price index goes up. In years where prices fall, benefits do not increase.
Not only do Social Security recipients see these increases, but military members can also see them in some situations. In addition, some private employers might offer a COLA for employees living in certain areas. Calculation of your increase is quite simple. Use the CPI-W and increase your benefits by the same amount.
Frequently Asked Questions
Yes, there is an SSA COLA 2025 increase. The SSA COLA 2025 increase equals 2.5%, and the SSA COLA 2024 increase was 3.2%. Though we do not know what the increase for 2026 will be yet, it appears that it will probably be lower than in recent years. The prices of goods have stabilized throughout 2024, so the SSA COLA for 2026 will likely reflect this normalization in inflation.
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 1970s and 1980s, the increase was very high. They commonly exceeded 10%. However, until recently, the increases have been much more modest in the 1-3% range.
Each year, when 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.
No, the COLA will not cause your benefits to decrease. In some years, the consumer price index might fall. However, this does not mean that your benefits will decrease. It simply means that your benefits will not increase in that year. Rest assured that you will continue receiving the same benefits you received the previous year.
You can find a Social Security Administration office near you by using our SSA office locator and searching for your closest location.
