What is COLA?

COLA refers to automatic cost-of-living adjustments applied by the Social Security Administration (SSA) in a number of contexts to account for the effects of inflation.

While the adjustments have been automatic since 1975, in that they do not need to be passed by an act of Congress (as was the case prior to the 1970s), the amount of those adjustments still needs to be calculated. To accomplish this, the SSA determines annual COLA increases based on changes to the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W).

Key Takeaways

• Despite being referred to as adjustments rather than increases, COLAs are never applied to reduce benefit payments. In the case of decreases in the CPI-W, or increases of less than 0.05 percent, payments will remain the same as those for the previous year.
• The COLA for 2023 represents an 8.7% over the COLA that applied to 2022 Since COLAs take effect in December of the year before the new rates otherwise apply to, you should expect to receive the increased payments in your January payments.
• It is also possible to receive the higher benefit amounts in December a free Online Social Security account, which you can also use to check the amount of your future benefits, check the status of your applications, and more.

The Necessity of COLAs

Inflation generally refers to an increase in the price of goods and services, with a corresponding decrease to the purchasing power for each unit of money. Whereas workers can demand higher wages, service providers can charge higher fees, and retailers can charge higher prices for their goods, people who receive fixed income such as Social Security payments would not be able to afford the same necessities to meet their basic needs after several years of inflation.

What do COLAs apply to?

• Social Security Disability Insurance (SSDI), which is paid to people who have a qualifying disability, have fulfilled certain work-based requirements, and have paid into social security for a set number of periods.
• Supplemental Security Income (SSI), which is paid to people whose income and assets are below certain levels, and, unless they are blind or age 65 or older, also have a disability. COLA is also applied to adjust the maximum amount of income you may earn while still receiving benefits.
• Retirement benefits, which are based on your past earnings, and which the SSA uses in calculating you primary insurance amount (PIA) that it ultimately uses to determine the amount of monthly retirement benefits you will receive. Since your PIA is subject to COLA increases, your retirement benefits will be recalculated and increased as well.
• Survivors benefits, which are payments made to the spouse, children, or parents of a deceased person who has earned a sufficient number of Social Security credits.
• In many cases, your spouse or dependant may be eligible to receive benefits as well, in which case the amount of payments they are entitled to will also be subject to COLA increases.

Note that while the most known uses of COLA are within the context of Social Security benefits, they are often used as an index for adjustments to workers’ compensation awards that are paid out incrementally over a number of years, child support, alimony, and many more.

Bottom Line

In these times of record inflation, it is more important than ever to be aware of how COLA adjustments can affect you and your benefits so that you budget and make important financial decisions accordingly.