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Do you know how Social Security’s annual cost-of-living adjustment (COLA) is determined?
One of the most important features of Social Security is its provision to annually adjust benefits for inflation—making it one of the few retirement income streams containing a clause designed to compensate for the loss of spending power caused by higher prices. This annual cost-of-living adjustment—COLA—is something many seniors eagerly anticipate each fall, and it’s one of the frequent topics we’re questioned about at our Social Security Advisory Service is.
So, let’s take a quick look at where that annual number comes from. It’s based on the Consumer Price Index for Urban Wage Earners and Clerical Workers, or CPI-W, and that’s a U.S. Bureau of Labor Statistics measurement of the average change over time in the spending patterns of workers employed in clerical or wage-paying jobs and who have been employed for at least 70 percent of the year.
While CPI-W is measured and reported monthly, the Social Security Administration only uses a snapshot of these statistics to determine COLA for the coming year. The CPI-W calculations for the months of July, August, and September only are added together and compared to the same three months from the preceding year and, if the current year’s total amount is higher, the current year figure is divided by the previous year figure to determine the percentage change. The quotient is then considered to be the COLA factor for the coming year.
If the current year figure is lower than the preceding year, the COLA is set at zero for the coming year, since Social Security benefits cannot be reduced as a result of the CPI calculation process.