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

If you receive Social Security benefits, you might notice that your payments include a cost-of-living adjustment each year.

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. 

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.

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Seretha henderson
Seretha henderson
4 months ago

Will we get a cola in 3021

Gerry williams
Gerry williams
4 months ago

Yes I do why don’t we do cola with Congress they absolutely do not bUT bicker and take off more than they are at work and limit their days off and vacation pay and retirement then maybe the poor can get a raise in social. Let congress trying living on $15000. A year. Pelosi drinks that much in a year or more. People are starving on social security and most of us worked 50 years plus to get those pennies

Tommy
4 months ago

You don’t give anything you find a way to get it back. Leavening use with nothing

sandra williams
4 months ago

So are you saying i might be able to get more money, Because what i is not enough to live on

Laura D. Rivard
Laura D. Rivard
4 months ago

I would like to know how I could get help, getting into my own place. Being that I am disabled, have no friend’s that could help me with the down payment and all the extra fee’s, that it would cost to get into a place of my own. Have no family, since my mother died 2 years ago, in December. So when I saw your website, I was hoping maybe, hopefully you could help me. PLEASE, tell me you can, I’m getting really tired of couch hoping between friend’s places, by the way I’ve lost A WHOLE LOT of friend’s… Read more »

Joann Farris
Joann Farris
4 months ago

In the 70′ we made $600. A month when we turned and drew Doc Security we kept working Got degrees and made $100,00 year but none of that was added to our checks only what we made when you turn 65. The loss is to us seniors who had to continue working was the big money we made later. The gov. Kept it. Will they ever put put the money robbed from social security and adjust out checks to what we have made over a life time. If we get a increase now. They raise B and it goes there.… Read more »

Brett Mitchell Whittle
4 months ago

Insightful!!!

Donald B Cannon
Donald B Cannon
4 months ago

How much social security will I get

Janice horton
Janice horton
4 months ago

Will we get a raise

Leave me alone with your spam
Leave me alone with your spam
4 months ago

What is the s*** how did it get on my phone I am not interested

2007
4 months ago

Truly how could SSA only take the third quarter instead of it being based on a year to year basis.So we could have been struggling in quarters 1 and 2 but because it’s not countedvthr cola adjustment would not be efficient. I personally glad to go on disability in 2007. Since that time there has been 3 years we did not a increase for 3 years. Now we all know that cost of living steadily increases each and every year. SSA never even went back to later providing that cola increase. It was just forgotten. It took me a total… Read more »

Walter Workman
4 months ago

That was great thank you

john Keller
john Keller
4 months ago

The cola shortchanged seniors and the disabled because it should count what seniors spend most of their money on namely all healthcare which has skyrocketed in the last few years.

Salvatore Trentacoste
4 months ago

Keeping up with inflation? Really? Seniors get screwed every yeae. the cost of living for seniors has gone up by 65% over the past 25 years at least and the amount of increases puts us seniors behind what we actually pay for health care food,and meds by 100 % .yet the congress.the morons that make 250,000 a year plus All the monet they steel,get in bribes,or paypla totaling millions tell seniors to budget our money better we avrage 1250 a month they get 20,000 a month plus graft.we actually need a 75% jncreas to make up for the shortages we… Read more »

Last edited 4 months ago by Salvatore Trentacoste
Angel Williams
Angel Williams
4 months ago

If a person on section 8 trust me people like me don’t see it my rent goes up and my food stamps get cut my rent is my entire check lucky my 20 yrs old daughter works at popeyes and even with her income we still barely I mean barely makeing it I have to be short on my rent to help my daughter pay the water and FPL so even if my SSI goes up I still don’t see it because my rent is my entire SSI check

Vicki Todd
Vicki Todd
4 months ago

Cost of living is usually more than the benefits increase. What would really be nice is to get my 1st stimulus check. I’m on SSI & SSD..2YRS OF DIRECTI DEPOSIT TO SAME ACCOUNT AND BANK.

Bob Hughs
Bob Hughs
4 months ago

Excellent Article, Devin, thank you very much

BRIAN WHITE
BRIAN WHITE
4 months ago

Why does SSA always round down and up when figuring/adjusting for COLA?? IS it because we might get a few extra pennies on our monthly checks??

Ronald Simmons
Ronald Simmons
4 months ago

Our luck will get O from what we have in the white house and congress

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