The Social Security Administration’s (SSA’s) cost-of-living adjustment (COLA) is designed to help beneficiaries keep up with inflation. However, there are some important nuances about how COLAs work that many people may not know. Here are five critical facts about COLA that everyone should be aware of.
1. This is Why COLAs Are Announced in October
The SSA determines COLAs based on the Consumer Price Index (CPI), which measures inflation. However, rather than considering the entire year’s worth of inflation data, the SSA looks at CPI data from the third quarter (July, August, and September) and compares it to the same period in the previous year.
This is why the announcement is made in October—after the final data for September is available.
2. This is Why COLA Projections Are Often Incorrect
Early projections of COLA adjustments are often inaccurate. These predictions are based on estimated inflation rates, but it’s not until the September CPI data is released in October that the SSA can make an informed and accurate determination of the COLA.
Therefore, projections for the upcoming year are based on guesses, and the final number can vary.
3. An Increase Is Not Guaranteed
While most years see some form of COLA increase, it’s not guaranteed. If the CPI remains the same or even drops between the previous year’s and current year’s third-quarter figures, there will be no COLA increase.
In fact, since 1975, there have only been three instances when the SSA decided no COLA was necessary: in 2009, 2010, and 2015.
The largest COLA increase since 1975 occurred in 1980, when it surged by 14.3% due to the energy crisis and stagflation. This was a challenging time, with significant price hikes in food and utility costs.
4. COLAs Benefit People Other Than Retirees
Though most people associate COLAs with Social Security retirement benefits, the increase applies to other groups as well. This includes:
Disabled People: Those receiving Social Security Disability Insurance (SSDI) also get COLA adjustments.
Survivors: Beneficiaries of deceased workers, including widows, widowers, and others receiving survivor benefits, see a boost in their monthly checks following a COLA increase.
SSI Recipients: People who receive Supplemental Security Income (SSI), a program for low-income elderly, blind, or disabled individuals, also benefit from the COLA adjustment.
5. This is Why It May Not Feel Like COLAs Are Keeping Pace
COLAs are based on the average inflation rate over the third quarter of the year. However, they may not reflect your personal experience with inflation. The COLA is backward-looking, meaning it measures past inflation, not current price levels.
Moreover, the average rate may not match the specific goods and services you purchase regularly, which may be rising faster than the national average.
Despite these frustrations, even small COLA adjustments help beneficiaries keep pace with inflation in challenging times.
