Social Security Cost-of-Living Adjustment (COLA)

Social Security COLAs are cost-of-living adjustments, or increases in benefit amounts, that the Social Security Administration makes to help recipients keep up with inflation. Some research has shown, however, that benefits continue to lose their buying power.

Terry Turner, Financial writer for Annuity.org
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  • Updated: August 15, 2023
  • 6 min read time
  • This page features 6 Cited Research Articles
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APA Turner, T. (2023, August 15). Social Security Cost-of-Living Adjustment (COLA). Annuity.org. Retrieved June 15, 2024, from https://dev.annuity.org/retirement/social-security/cola/

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Social Security cost-of-living adjustments (COLAs) are increases in benefit amounts made by the Social Security Administration to help recipients keep up with inflation. However, some research has shown that benefits continue to lose their buying power.

The COLA, which applies to approximately 70 million beneficiaries, is drawn from the Bureau of Labor Statistic’s consumer price index for urban wage earners and clerical workers — also known as the CPI-W.

While the CPI-W has led to COLAs most years, in some years, the index has calculated inflation as nonexistent, meaning there was no increase. For instance, there were no benefit increases in 2010, 2011 or 2016.

But in 2022, the Social Security COLA was 5.9%. And in 2023, it is 8.7%.

COLAs are controversial for several reasons. Advocates for seniors say they are inadequate to keep up with the increasing costs of real expenses faced by retirees. On the other hand, some want to reduce COLAs to cut Social Security expenses, arguing that beneficiaries can adjust by purchasing less expensive items.

COLA History

COLAs have existed in some form since 1975.

But when Social Security was first enacted in 1940, there was no provision in the law for adjustments based on inflation. In fact, the first Social Security payee was a retired legal secretary named Ida May Fuller from Ludlow, Vermont. She received $22.54 a month for ten years.

At the time it was created, Social Security’s benefit was expected to remain constant. But in 1950, Congress added amendments to the law, including an increase of 77% in Social Security benefits. Ida May Fuller’s monthly benefit jumped to $41.40 in October 1950. That increase was followed by another raise in September 1952 after another action by Congress.

In 1972, Congress passed new legislation that instituted automatic benefit increases based on the increase in consumer prices beginning in 1975. Coincidentally, Ida May Fuller died in 1975 at the age of 100.

The 1972 law for automatic increases only applied if the consumer price index rose by at least 3%. When inflation rates began to slow, it raised the possibility that there would be no COLA. In 1986, Congress eliminated the 3% trigger, allowing for automatic COLAs tied to the consumer price index.

How Is COLA Calculated?

The government calculates the Social Security COLA by comparing the average CPI-W of the third quarter of the previous year to the average CPI-W of the third quarter of the current year.

The year-over-year percentage increase is the COLA, or the increase in Social Security benefits beginning in December.

COLA Calculation Controversy: CPI-W vs. Chained CPI vs. CPI-E

When Social Security implemented automatic COLAs in 1975, the CPI-W was the only national consumer price index produced by the Bureau of Labor Statistics. Today, the CPI-W represents expenditures made by only 29% of the U.S. population.

The use of the CPI-W to calculate COLAs has been the subject of controversy for years. There are critics on both sides of the issue. Some say the CPI-W overestimates the effects of inflation on seniors while others say it underestimates the costs.

Those who think the CPI-W overestimates real-life increases in the cost of living want to control or manage spending by using an index called the chained CPI. This index considers adjustments that consumers make when prices rise, like switching to different products. For example, if the price of steak increased significantly, then consumers might buy more chicken instead.

Other critics argue that the CPI-W applies to the general population and doesn’t consider the expenses shouldered more by seniors, such as health care costs and shelter — two expenses that rise at a faster rate. They urge the adoption of an index like the CPI-E, which is an experimental index designed to consider costs specific to the elderly (people aged 62 or higher).

Weighted Differences Between CPI-W and CPI-E

Category CPI-W Weighted Calculation CPI-E Weighted Calculation
Food and Beverages 16.4% 12.4%
Housing 39.2% 46.6%
Medical Care 5.4% 11.3%

Impact of Changing the COLA Index

According to a 2019 report by the U. S. Government Accountability Office, changing from the CPI-W to one of the alternative indexes would have a relatively small impact on benefits in any given year, but it could become significant over time.

The impact of the change would be most profound on low-income retirees who are on Social Security for an extended period. The report said a chained CPI used for 30 years would result in a decrease in benefits of about 6% for a low-income household. Whereas, switching to the CPI-E would increase income for that same household by almost 4% since low-income households rely more heavily on Social Security, which accounts for 81% of their retirement income.

In contrast, for high-income households, the chained CPI would decrease total retirement income by only 1%, and using the CPI-E would increase it by a similar amount over the same 30 years. High-income households rely on Social Security for only 15% of their overall retirement income, and they are more likely to have other sources of income, such as pensions, investments and retirement annuities.

The Social Security Administration has estimated that changing to the chained CPI would push roughly 456,000 people into poverty by 2050 while changing to the CPI-E would instead lift 238,000 people out of poverty by the same year.

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Social Security COLAs vs. Inflation

Whether or not a change is implemented, researchers and advocates for seniors say the way COLAs are calculated is inadequate, causing Social Security to lose its buying power despite the increases.

The Senior Citizens League, a nonpartisan seniors’ group, says program benefits have lost 40% of their buying power since 2000. According to the League, COLAs increased benefits by 64% between 2000 and 2022, but the costs of goods and services rose 130% in that same time.

The League studies how inflation affects retirement by tracking the ongoing decline in purchasing power. They compare COLA growth with the price increase across 37 goods and services often used by retirees.

Inflation and Senior Purchases

The League notes that costs are rising sharply, especially for home heating, gas and food items. The following are the fastest-growing costs for seniors, measured between March 2021 and March 2022.

Top 10 Fastest Growing Costs

  1. Home Heating Oil: 79% increase
  2. Gasoline: 51% increase
  3. Used Vehicles: 35% increase
  4. Propane: 30% increase
  5. Eggs: 26% increase
  6. Bacon: 23% increase
  7. Oranges: 16.5% increase
  8. Coffee: 16% increase
  9. Medicare Part B Premium: 14.5% increase
  10. Ground Chuck: 13% increase

In 2022, the League called for a COLA of at least 8.6%. In 2023, the Social Security COLA is 8.7%.

Medicare’s Effect on COLAs

According to a 2018 congressional report, Medicare and Social Security adjustments are measured by different indexes, which results in a faster rate of increase for Medicare premiums than for COLAs.

But in September 2022, the CMS announced that premiums for Medicare Part B, which are automatically removed from the Social Security benefits paid to seniors, would be reduced in 2023. Premiums dropped to $164.90, down from $170.10 in 2022, in an effort to address the historic inequity.

How Does COLA Affect Retirement Planning?

When living on a fixed income provided by Social Security, it’s important to keep an eye on upcoming COLAs. A low COLA might mean you’ll find yourself losing buying power, whereas a high COLA could mean you’ll be able to stretch your income further.

It requires a balance between inflation and the COLA to ensure the longevity of your retirement funds. Otherwise, you might need to dig into your savings sooner than expected.

There are also other investment options to consider during high inflation that can provide consistent income during retirement and help fight cost-of-living increases.

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Last Modified: August 15, 2023

6 Cited Research Articles

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  1. Hinkle, Mark. (2022, October 13). Social Security Announces 8.7% Benefit Increase for 2023. Retrieved from https://www.ssa.gov/news/press/releases/2022/#10-2022-2
  2. CMS.gov. (2022, September 27). 2023 Medicare Parts A & B Premiums and Deductibles 2023 Medicare Part D Income-Related Monthly Adjustment Amounts. Retrieved from https://www.cms.gov/newsroom/fact-sheets/2023-medicare-parts-b-premiums-and-deductibles-2023-medicare-part-d-income-related-monthly
  3. Senior Citizens League. (2022, May 11). Social Security Benefits Lose 40% of Buying Power COLA for 2023 Could Be 8.6%. Retrieved from https://seniorsleague.org/social-security-buying-power/
  4. Jeszeck, Charles A. (2019, January 28). Retirement Security: Alternate Price Indexes for Cost-of-Living Adjustments Present Tradeoffs. Retrieved from https://www.gao.gov/assets/gao-19-218r.pdf
  5. Peris, Kristanna H. (2018, September 28). The Interaction Between Medicare Premiums and Social Security COLAs. Retrieved from https://sgp.fas.org/crs/misc/R45324.pdf
  6. Social Security Administration. (n.d.) Cost-of-Living Adjustment (COLA) Information for 2023. Retrieved from https://www.ssa.gov/cola/