The Social Security COLA: How Your Adjustment Is Calculated and Applied

If you are older than 62,   you’ve probably noticed that in most years your Social Security benefits are increased with a cost of living adjustment. 

The cost-of-living adjustment, or Social Security COLA, increases your monthly benefit amount to help your income keep up with inflation. Without the COLA added to your payments, the purchasing power of your benefit would erode as the prices of the things you routinely buy increased over time. 

The annual Social Security COLA amount is normally announced in mid-October. Many people anxiously await the announcement to see how much (if any) that their benefit amount will increase in the coming year. 

If you await the announcement but feel like the process of coming up with each year’s COLA feels mysterious, I want to cover how the Social Security administration calculates these annual cost-of-living adjustments and then applies them to your benefit. 

That way, not only will you know how to look at the data for yourself and avoid a surprise when the announcement comes out, but you’ll also have a better grasp on what the increase means in terms of dollars to your benefit. 

The History of the Social Security COLA

Today, we have a fairly clear-cut process for determining how much the Social Security COLA will be every year. It’s an automated process that requires no new laws, policy or other government legislation. 

But the process wasn’t always automated like it is now. 

Prior to 1975, the Social Security cost-of-living adjustments were all set by Congressional action. Those were not that dependable, to say the least. 

For the first decade of Social Security’s existence, there were no increases to benefits. Then in 1950, benefits increased by 77%. In 1952, they went up by an additional 12.5%. Two years later, in 1954, benefits increased by another 13%. 

After that, the pace of adjustments and increases slowed down. The Social Security Administration only increased benefits eight times between 1954 and 1975. 

This was when a new law took effect, which mandated that Social Security payments be be pegged to the annual changes in the consumer price index (or CPI). This is a measurement of inflation tracked by the Bureau of Labor Statistics.

How the CPI Determines Social Security COLA

The specific inflation measurement used by the Bureau of Labor Statistics is called the CPI-W, which is the Consumer Price Index for Urban Wage Earners and Clerical Workers. This index tracks the pricing of a basket of things that consumers routinely buy.  

There are lots of things this index tracks. The food category makes up nearly 15% of the total index. But within that category, it gets broken out into sub-categories like pork, for example, which is 0.382% of the index.

From there the index gets even more specific, looking at a precise cut like porkchops (which makes up 0.069% of the index, if you wanted to know). 

The intent of this index is to understand, track, and record price movements of commonly-purchased consumer goods. If prices begin to increase, the index will reflect those increases. 

How to Calculate the COLA for Social Security Benefits

The Bureau of Labor Statistics releases the consumer price index on a monthly basis; each update reflects numbers for the prior month. This is usually released about the middle of the month; June’s data, for example, will be released around July 15.

Now, it seems like it would make the most sense to simply take the aggregate value of the consumer price index on a year-over-year basis to see how much inflation changed from one year to the next.

But this is Social Security, and nothing is ever that simple. Instead, they only use the data from the third quarter of the year — or the CPI reading from July, August, and September.

From there, they compare those numbers to the prior year’s July, August, and September readings.

In other words, the way the comparison is made is by adding the data for the third quarter of the prior year, and the data for the third quarter of the current year, and then comparing the percentage difference between the numbers. 

If there is a positive change, the amount of change is the amount of COLA for Social Security benefits. If the numbers do not change, or go down, then benefits will not change for the following year. This has happened only a handful of times in recent history with the most recent being 2015.  

That’s all there is to it. So if you want to get a head start on figuring out what the annual COLA will be on your Social Security income, you can start watching this number in August, when July’s CPI is released. 

How the Social Security COLA Applies to Your Benefit Check

Since 1983, the cost-of-living increases have been applied every December, which is payable in the check you receive in January.  

A lot of people are under the impression that your future benefit is increased by the annual cost-of-living increase. That’s only true for certain people, because the COLA changes only apply at your benchmark year and beyond.

The benchmark year is a social security term that simply means the year you turn 62, become disabled, or die for calculating survivor benefits. Prior to the benchmark year, your benefits are increased based on changes to national wages. 

So, for most people who are just filing for a retirement benefit, the cost-of-living adjustment doesn’t even matter that much until age 62. The first COLA which will become effective is the one announced in the year you attain 62. 

For example, there were a lot of people who were anxious to find out if the 2022 COLA would increase their benefit since they were also turning 62 in 2022. Alas…the 2022 COLA was announced in 2021 so it only became effective for those who turned 61 in 2021 or earlier. 

Interestingly, once you turn 62 you can’t just look at your benefits estimate and assume all of the listed estimate amounts for the various ages will increase by the announced COLA. 

Instead, the Social Security COLA is applied to your primary insurance amount (PIA) and then adjusts that  based on increases for filing later or reductions for filing early. 

The exact steps to calculate and apply the changes to your benefit are as follows:

1. Adjust PIA for the COLA
2. Apply that adjustment for filing before or after full retirement age. These results are rounded to the next lower dime. 
3. Subtract any offsets (such as Medicare Part B premiums) from the benefit; the remainder is rounded down to the next lower dollar.

Following these steps will help you understand the math behind figuring out why your benefit increase was slightly different than you expected. 

There’s no question that the Social Security COLA is a powerful piece of your retirement income keeping up with inflation. 

If you still have questions, you could drop them in the comments below, or you could just join my FREE Facebook members group. There are some brilliant people over there who love to answer any questions you may have about Social Security. From time to time I’ll even drop in to add my thoughts, too.

You should also consider joining the 260,000+ subscribers on my Social Security Intelligence YouTube channel! For visual learners (as most of us are), this is where I break down the complex rules and help you figure out how to use them to your advantage.

One last thing, be sure to get your FREE copy of my Social Security Cheat Sheet. This is where I took the most important rules and things to know from the 100,000 page Social Security website and condensed it down to just ONE PAGE! Get your FREE copy here.