What’s social security cola?

Social Security provides various forms of benefits to beneficiaries, including retirement benefits, disability benefits, and survivor benefits. These benefits increase periodically as Social Security adjusts benefits to keep up with the rising inflation. The increases are known as cost-of-living adjustments (COLA).

Social Security COLAs are the cost-of-living adjustments that the Social Security Administration makes to help Social Security beneficiaries keep up with inflation. COLAs are announced each year when there is an increase in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). For 2023, the Social Security COLA is 8.7%, up from 5.9% in 2022.

What is COLA?

COLA is an adjustment made to Social Security and Supplemental Security Income to help beneficiaries maintain their purchasing power. The change is based on the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). The annual COLA ensures that the purchasing power of Social Security benefits is not eroded by the effects of rising inflation.

COLA is calculated by comparing the highest CPI-W of the third quarter average ever recorded to the average CPI-W of the current year. The percentage increase between the two data points determines the Social Security COLA. If the CPI declined or remained constant, there won't be an adjustment to the Social Security benefits. When Social Security has determined a COLA percentage increase for the year, Social Security beneficiaries will receive higher benefits starting from January of the following year.

History of COLA

When Social Security was established, there was no provision in the Social Security Act for benefits to be adjusted for inflation. The benefits were expected to remain constant, with beneficiaries expected to receive the same amount year-to-year. For example, Ida May Fuller, the first Social Security payee, received a $22.54 check every month for the first decade.

In 1950, Congress amended the law to allow a 77% increase in Social Security benefits. Ida’s benefits increased from $22.54 to $41.40 per month starting from October 1990, followed by another raise in September 1952 following another amendment to the law by Congress.

In 1972, Congress amended the law, allowing automatic increases only if the Consumer Price Index increased by at least 3%. However, when the CPI fell below 3%, it meant there would be no COLA. A 1986 amendment eliminated the 3% CPI minimum, and instead allowed for automatic COLAs tied to the CPI.

Social Security COLA for 2023

Social Security announced the 2023 COLA on October 13, 2022, and it increased from 5.9% in 2022 to 8.7% in 2023. The COLA raise is the highest since 1981 and the fourth-largest COLA in Social Security's history.

The 2023 COLA increased the average Social Security benefits from $1,681 to $1,827, an increase of $146. For married couples, the average benefit increases from $2,734 to $2,972, an increase of $238. Additionally, the maximum benefits for a person claiming benefits at the full retirement age increased from $3,345 to $3,627, an increase of $282. The COLA increase took effect in December 2022, and the increased benefits started in January 2023.

All Social Security beneficiaries are eligible to receive the increased benefits, and they don’t have to do anything to claim the Social Security COLA.

How is COLA calculated?

The Social Security COLA is pegged to the growth in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). CPI-W tracks the average change in prices over time for consumer goods and services to determine how they are changing.

The Bureau of Labor Statistics calculates COLA by comparing the highest CPI-W of the third calendar quarter ever recorded, and the average CPI-W of the third quarter for the current year. If the average for the current year is higher, the percentage increase is deemed to be the COLA. The highest CPI-W ever recorded is known as the computational quarter.

When calculating the 2023 COLA, we consider the average CPI-W average of the current year, and the highest-ever CPI-W in prior years. In this case, the average CPI-W for the third quarter of 2022 was 291.901, while the highest CPI-W ever for the prior years was the CPI-W for the third quarter of 2021 i.e. 268.421. In this case, the 2023 COLA is calculated as follows:

(291.901-268.421)/ 268.421 x 100=8.74% (rounded off to 8.7%)

Therefore, the Social Security COLA in 2023 is 8.7%.

Why would there be no COLA?

The Social Security Act provides that there is an automatic COLA only if the average CPI-W in the third quarter of the current year exceeds the CPI-W of the computational quarter. This means that if the CPI-W of the current year is lower than the CPI-W of the computational quarter, there won’t be an automatic COLA for that year.

For example, the Social Security COLA for 2010 and 2011 was 0%. For 2010, the average CPI-W for the third quarter of 2009 was lower than the average CPI-W for the third quarter of 2008 (the highest average CPI-W ever recorded). As a result, there was no automatic COLA i.e. 0%. 

For 2011, the Social Security COLA was calculated by comparing the average CPI-W for 2010 and the highest average CPI-W from prior years. In this case, the computational quarter was the 2008 CPI-W average, since it was higher than the 2019 CPI-W average. Also, the 2008 CPI-W average was the highest CPI-W average ever recorded. Since the 2008 CPI-W average was higher than the average CPI-W for the third quarter of 2010, there was no COLA in 2011.

For 2012, the average CPI-W for the third quarter in 2011 exceeded the 2008 CPI-W. Hence, there was a COLA for 2012.