A cost-of-living adjustment (COLA) is a raise in Social Security benefits that aids recipients in maintaining the pace of inflation. Increasing costs can cause erosion in fixed incomes, complicating it for retirees and other recipients to pay for ordinary expenses. What Is a Cost-of-Living Adjustment (COLA)? It is an economic protection that makes Social Security and Supplemental Security Income (SSI) payments maintain their purchasing ability.
How COLA Works?
COLA changes are based on inflation, as measured by the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). When the CPI-W increases, Social Security benefits rise to level with the increased cost of living. The Social Security Administration (SSA) computes COLA each year by comparing the CPI-W in the third quarter of last year to the third quarter of the current year. When there is little or no inflationary increase, no COLA adjustment takes place.
COLA Trends and History
COLA increases were not automatic prior to 1975. Prior to that, Congress manually had to approve increases. In 1975, legislation was enacted that permitted automatic annual COLA increases tied to inflation. In the 1970s, inflation was very high, and this resulted in COLA increases of up to 14.3% in 1980. Conversely, in years of low inflation, like 2010 and 2016, there was no COLA increase at all.
Recent COLA Increases
In 2023, COLA increased by 8.7%, one of the largest hikes in decades, as a result of steep inflation in 2022. As inflation rates came down, COLA adjustments also reduced. In 2024, the hike was 3.2%, and for 2025, it has been fixed at 2.5%. This translates to a person who gets $10,000 in Social Security benefits in 2024 receiving an increase to $10,250 in 2025.
Calculating Your COLA Increase
Beneficiaries can determine their COLA increase by taking their current monthly payment and multiplying it by the COLA percentage. For instance, if an individual pays $1,500 each month in 2024, the raise for 2025 would be 2.5% of $1,500, which is $37.50. The new monthly payment would be $1,537.50.
Hold-Harmless Provision
There is a special rule called the hold-harmless provision that guarantees that COLA increases will not cause a decrease in Social Security benefits because of increasing Medicare Part B premiums. What this means is that if Medicare premiums go up by more than the COLA increase, some beneficiaries will have their premium hikes limited so that they won’t see their Social Security payments decrease.
Other Types of COLA
COLA is not reserved for Social Security. Certain government and private sector employers offer COLA raises for workers in areas with high costs. The armed forces also offer temporary COLA increases for those who are based in high-cost areas.
Final Thoughts
What Is a Cost-of-Living Adjustment (COLA)? It is a vital tool to make sure that Social Security benefits keep up with inflation. Because inflation rates constantly change, COLA adjustments fluctuate yearly but are still a vital financial protection for millions of Americans.
