What Is a Cost-of-Living Adjustment (COLA)?
COLAs are typically equal to the percentage increase in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) for a specific period. The Consumer Price Index (CPI) represents the average prices of a basket of goods and is used to measure inflation.
The COLA for 2022 is 5.9%, meaning for someone who received $10,000 in Social Security benefits in 2021, their 2022 annual benefit would total $10,590.
- A cost-of-living adjustment (COLA) is an increase in Social Security benefits to counteract inflation.
- Inflation is measured using the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W).
- Automatic yearly COLAs began in 1975.
- The COLA for 2022 is 5.9%.
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Understanding Cost-of-Living Adjustment (COLA)
Because inflation was high during the 1970s, compensation-related contracts, real estate contracts, and government benefits used COLAs to protect against inflation. The U.S. Bureau of Labor Statistics (BLS) determines the CPI-W, which the Social Security Administration (SSA) uses to compute COLAs. The COLA formula is determined by applying the percentage increase in the CPI-W from the third quarter of one year to the third quarter of the following year. This information is updated regularly on the SSA website.
Congress ratified a COLA provision to offer automatic yearly COLAs based on the annual increase in the CPI-W that went into effect in 1975. Before 1975, Social Security benefits were increased when Congress approved special legislation. In 1975, COLAs were based on the increase in the CPI-W from the second quarter of 1974 to the first quarter of 1975. From 1976 to 1983, COLAs were based on the increases in the CPI-W from the first quarter of the previous year to the first quarter of the current year. Since 1983, COLAs have been dependent on the CPI-W from the third quarter of the previous year to the third quarter of the current year.
COLAs depend on the CPI-W from the third quarter of the previous year to the third quarter of the current year.
Inflation levels ranged from 3.3% to 11.3% in the 1970s. In 1975, the COLA increase was 8%, and the inflation rate was 9.1%. In 1980, the COLA reached the highest level in history at 14.3%, while the inflation rate was 13.5%. During the 1990s, drastically lower inflation rates prompted small COLA increases averaging 2% to 3% per year. That continued into the early 2000s, when even lower inflation rates resulted in no COLA increases in 2010, 2011, and 2016. The COLA for 2022 is 5.9%, up from 1.3% in 2021.
COLA is reliant on two components: the CPI-W and the employer-contracted COLA percentage. CPI determines the rate of inflation and is compared yearly. When consumer prices drop—or if inflation has not been high enough to substantiate a COLA increase—recipients do not receive a COLA. If there is no CPI-W increase, then there is no COLA increase.
When a COLA increase is not approved, Medicare Part B premiums remain the same for approximately 70% of beneficiaries who get the premiums deducted from their Social Security checks. However, the remaining recipients—those with higher incomes, those who did not participate in Social Security through their employer, and new beneficiaries—must pay the Medicare Part B premium increases.
The standard monthly Medicare Part B premium set for 2021 is $148.50, but the premium rises to $170.10 in 2022—an increase of $21.60 from 2021.
Other Types of COLAs
Some employers, such as the U.S. military, occasionally give a temporary COLA to employees who are required to perform work assignments in cities with a higher cost of living than their home city. This COLA expires when the work assignment is finished.