What is a Cost-of-Living Adjustment (COLA)?

The Social Security Administration (SSA) makes cost of living adjustments (COLA) to Social Security benefits to keep up with inflation. For 2021, the COLA is 1.3%. The COLA rate for 2020 was a higher 1.6%. People who receive Social Security benefits, Supplemental Security income, Social Security Disability Income and surviving spouses are all eligible to receive COLA increases. The amount of the increase varies from year to year, and there’s no guarantee that the SSA will issue any COLA’s.

History of Cost-of-Living Adjustment (COLA)

Remember the 1970s? Sky-high unemployment, inflation approaching 20% and the oil crisis probably come to mind, as least from an economic perspective. It was a surprise to many, as America had enjoyed halcyon economic growth since World War II.

Given the soaring rate of inflation, Congress realized that anyone depending on Social Security benefits was suffering from a dip in purchasing power. They responded by passing the 1972 Social Security Amendments which provided cost of living increases for those receiving benefits. Prior to this, Congress had to approve increases one at a time. Now the COLA was built into the system. The first year of automatic COLA increases was 1975 and allowed for an 8% increase. Thanks to the extremely high rate of inflation, COLA raises remarkably reached 14.3% in 1980. Most years saw more modest increases. However, if the rate of inflation is minimal and prices remain steady, there’s no guarantee of an increase. The years 2009, 2010 and 2015 didn’t get any increase at all.

What is the Cost-of-Living Adjustment for 2021?

For 2021, the Cost-of-Living Adjustment is 1.3%. So, if you received $1,000 a month in benefits in 2020, you would receive a nominal increase to $1,013 for 2021. No, that’s not a lot of money, but it’s just supposed to offset the effect of inflation. And in some years, COLA does rise a bit more if the rate of inflation warrants it.

CPI-W & The Employer-contracted COLA Percentage

The SSA uses a formula based on increases in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). This is an inflationary index with consumer spending tracked in eight major categories and dozens of subcategories. CPI-W is calculated every month from the Bureau of Labor Statistics. SSA compares the average of the CPI-W for July, August and September (the third quarter) to the same 3-month period of the previous year. The difference between these numbers in the amount of the COLA.

Something of interest to senior citizens is that they tend to spend their money differently than urban and clerical workers. Senior citizens tend to spend more money on housing and medical care and much less on money on education, transportation and apparel. This means the COLA is probably not entirely fair to senior citizens, and according to The Senior Citizens League (TSCL), seniors have lost 30% of their buying power since 2000. For example, the cost of prescription drugs has risen 252% since 2000. More than half of all senior citizens take more than four prescription drugs, and 89% take at least one. The TSCL would like to see the COLA based off the Consumer Price Index for the Edlerly (CPI-E) to better compensate senior citizens.

That change would benefit seniors, but it might be far in the future. For now, the CPI-W is what COLAs are based on. Social Security benefit recipients receive the 2021 Cost-of-Living Adjustment starting in January of 2021. Increased payments for Supplemental Security Income recipients start December 31, 2020. These increases also apply to railroad retirement “tier one” benefits. Although the federal Civil Service Retirement System (CSRS) and the federal military retirement programs aren’t directed affected by the COLA, they use a similar formula and the rate of adjustment is usually close to the COLA.

Final Thoughts

Although you can probably count on at least a small COLA in your Social Security benefits per year, it might not be enough to offset rising medical and other expenses that seniors have. Plan accordingly for your retirement by talking to a Certified Financial PlannerⓇ. You want to make the most of your retirement money.