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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.
This posting is presented for informational purposes only and does not represent legal or financial guidance. Any opinions or interpretations presented are either those of the original author or, in the case of articles authored by the AMAC Foundation, are the opinions of AMAC Foundation staff, originally trained and accredited by the National Social Security Association (NSSA) and certified via the AMAC Foundation. Any links included in the article are valid on the posted date; socialsecurityreport.org cannot guarantee the duration of the links’ validity. NSSA and the AMAC Foundation and its staff are not affiliated with or endorsed by the Social Security Administration or any other governmental entity. To submit a question, visit our website (https://amacfoundation.org/services/) or email us at ssadvisor@amacfoundation.org. Because we are a non-profit organization, there is no charge for these services.