A cost of living adjustment (COLA) is one of the most important features of your Social Security retirement benefit. A COLA means that your monthly payment is indexed for inflation. (Many other defined benefit pensions pay a fixed amount each month, regardless of the inflation rate.) In ordinary times, inflation-indexing over a year or two is not terribly meaningful. However, the value of the inflation protection increases dramatically over the twenty or thirty years a healthy person might live in retirement.
Inflation Increases Your Financial Needs - Your COLA Helps
The concern with inflation is not increasing your standard of living. Instead, it's about maintaining it. For example, assuming a modest 3% inflation rate, your income would need to increase over 80% from age 65 to age 85 just to retain the same standard of living. If inflation were 4%, your income would have to more than double over those twenty years!
How COLA Assists You
Due to previous Congressional legislation, your Social Security benefits are indexed for inflation. Since the law was enacted in 1973, Social Security provides for automatic cost-of-living adjustments, or COLAs. If there is positive inflation, your retirement benefit increases.
How Is The COLA Determined?
A specific formula drives the determination of the COLA. Specifically, the third quarter increase in the Consumer Price Index (CPI-W) over the previous year’s third quarter index is the guiding principal for the calculation.
When Is The COLA Announced?
The COLA is announced every year during October. The adjustment takes effect for benefits paid in December.
How Much Could The COLA Be?
The extent of the COLA depends on the CPI-W. Since 1980, the annual COLA has been as high as 14.3% (1980, a period of high inflation) and as low as 1.3% (1998). The 2008 COLA was 5.8%. Here’s the COLA history since 1975.