Social Security and Cost-of-Living Adjustments (COLAs)
The Social Security program began collecting funds from workers in 1935 and then began paying out monthly benefits to retired Americans in 1940. The amount of the Social Security payments did not increase for the next 10 years. Early on, any increases were made by a special act of Congress, and usually during an election year. It wasn’t until 1972 that Congress passed a law creating Cost-of-Living Adjustments (COLAs) for Social Security payments.
Since that time, the payments have increased, or not, annually in an attempt to keep up with inflation. These annual increases in payments have ranged from zero in 2010, 2011 and 2016 to 14.3% in 1980. Monthly payments to retired workers have increased to an average of $1,657 per month in January 2022.
How do COLAs work?
Social Security cost-of-living adjustments are annual adjustments to the amount of money paid out to Social Security beneficiaries. The purpose of these adjustments is to help beneficiaries keep up with inflation and maintain their purchasing power over time.
The Social Security Administration uses a specific formula to calculate COLAs based on changes in a subset of data called the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). The CPI-W measures changes in the prices of goods and services that people typically buy, such as food, housing, clothing, and medical care.
When there is an increase in the CPI-W, Social Security benefits are adjusted upward to reflect the increased cost of living. Conversely, if there is a decrease in the CPI-W, benefits may be adjusted downward, although this is relatively rare.
The size of the COLA varies from year to year depending on the inflation rate. For example, in 2022, the COLA was 5.9%, which was the highest in 40 years, due to the significant inflation caused by the COVID-19 pandemic. In contrast, the COLA for 2017, 2018, and 2019 was 2%, while there was no COLA for 2016.
Overall, Social Security COLAs help to ensure that beneficiaries can maintain their standard of living over time, even as the cost-of-living increases.
Senior citizens and buying power
Data shows that the buying power of senior citizens has dropped 36% since the year 2000. According to the Senior Citizens League, Social Security benefits have not managed to keep up with the rate of inflation. Retirees would need an extra $516 per month to live as well as they did in the year 2000.
With the last COLA increase of 5.9%, the buying power of seniors increased from the previous year’s 40% reduction since 2000. This small 4% gain is a slight improvement that still handicaps the purchasing power of senior citizens.
The top 5 categories of fastest-growing costs for seniors included eggs, bread, apples, coffee and dental bills. Other fast-growing costs include prescription drugs and heating oil. The average increase in Social Security payments for 2023 of $140 per month can provide a small amount of financial relief for senior citizens in their day-to-day spending.
Looking to the future
The Social Security Administration uses the CPI-W data for the third quarter of each year to determine the annual cost-of-living adjustment for the following year. Recent data from the government shows inflation is slowing, which will have an impact on the cost-of-living adjustment, most likely as a smaller increase for next year. According to the Senior Citizens League, the cost-of-living adjustment could be as low as 3.1% in 2024.
Lori Stratford is the Digital Marketing Manager at Navicore Solutions. She promotes the reach of Navicore's financial education to the public through social media and blog content.