Cost-of-Living Adjustment (COLA): What It Is, How It’s Calculated
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A cost-of-living adjustment (COLA) is an alteration of a benefit or payment based on changes in the prices of goods and services in the economy. The Social Security Administration calculates and applies COLAs to payments it makes to beneficiaries. In 2023, the Social Security cost-of-living adjustment was 8.7%.
The Social Security Administration (SSA) calculates cost-of-living adjustments (COLA) by comparing this year’s costs of goods and services to last year’s costs for the same items. The agency then translates the difference in those prices into a percentage, which it applies to Social Security benefits as a COLA.
The SSA calculates COLAs annually and applies them to Social Security benefits automatically. You don’t have to do anything to receive a COLA.
If the SSA doesn’t approve a COLA for a given year, your benefits stay the same.
» MORE: Social Security's 2023 COLA
How does the Social Security Administration calculate a COLA?
A Social Security COLA is based on changes in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). A consumer price index tracks how the price of consumer goods and services changes over time.
This specific index focuses on categories of goods and services that are most likely to affect families earning at least half their income from hourly-wage or clerical jobs.
An increase in the CPI-W indicates that inflation is on the rise. And that means the SSA needs to adjust benefit payments to help recipients afford basic expenses.
To calculate a COLA, the SSA compares the average CPI-W for the third quarter of the current year to the average CPI-W for the third quarter of the last year when a COLA was approved.
If the average CPI-W has increased by more than a tenth of 1%, the SSA will approve a COLA, meaning it will increase benefits.
Your benefit increases by the percentage change in the average CPI-W. So if the average CPI-W increases by 3.1%, your benefit increases by 3.1%.
If there is no change in the average CPI-W, or the CPI-W rate actually decreased, the SSA will not approve a COLA.
COLA example
Here are the CPI-W readings for the third quarters of 2003 and 2004.
2003 | 2004 | |
|---|---|---|
July CPI-W | 179.6 | 184.9 |
August CPI-W | 180.3 | 185.0 |
September CPI-W | 181.0 | 185.4 |
Average CPI-W for third quarter | 180.3 | 185.1 |
Because the average CPI-W in the third quarter of 2004 is higher than the average CPI-W in the third quarter of 2003, the SSA provides a cost-of-living adjustment. The COLA equals the percent difference in the two CPI-W averages, which in this case is 2.66%. The Social Security Administration rounds it to the nearest tenth of a percent, so in this case the COLA is actually 2.7%.
When will the COLA for 2024 be announced?
The SSA usually announces COLAs in October. The agency calculates COLA following the end of the third quarter each year. This is because the SSA compares the third quarter’s average CPI-W to the third-quarter average of the last year a COLA was approved to calculate the adjustment rate.
When does Social Security COLA take effect?
The SSA begins applying COLAs annually in December. Social Security Income (SSI) beneficiaries might receive updated payments that month, but beneficiaries of other Social Security programs such as SSDI might not see the adjustment until January. This is because Social Security typically pays benefits a month after they are approved.
Social Security COLAs are usually announced in October. Watch the news for an update so you can plan ahead for future payments.
How does a COLA apply to Social Security payments?
The Social Security COLA applies to a person’s primary insurance amount (PIA), which is the monthly retirement benefit a person receives if they apply for benefits at full retirement age. Retiring early or delaying retirement can change the amount of your PIA.
