What is the cost of living adjustment

COLA cost of living adjustment

Cost-of-living adjustment (COLA) is the automatic upward adjustment of Social benefits for inflation by the Social Security Administration (SSA) to help counteract the effects of rising prices in the economy. COLA has been in use since 1975. It’s based on the increases in the cost of living, as measured by the changes in the wage earners’ consumer price index (CPI-W) in a specific period.

The Consumer Price Index (CPI)  represents the average prices of a basket of goods which includes food, energy, and medical care (inflation).

All individuals eligible for Social Security, Supplemental Security Income (SSI), and railway retirement benefit will automatically get the inflation adjustment (rounded to the nearest one-tenth of 1 %.). Some individuals do receive both Social Security and SSI benefits.

The SSA usually applies these COLA changes and other benefits on January 1.

Why the SSA makes COLA adjustments

Social Security makes up a decent sum of U.S. Senior’s retirement income, rapid price increases over a year tend to diminish the value of that income as well as the value of other payments.

The increase helps these seniors adjust to higher living costs.

However, these yearly adjustments tend to strain Social Security’s finances. Big increases fasten the exhaustion of the SSA trust fund.

When will Social Security fund run out of money

The trust fund is projected to last till 2035.

The major source of Social Security funding is federal payroll taxes (90%), hence any recession or freeze in employment coupled with COLA increases usually has a negative effect on the fund.

Currently, the trust fund has sufficient funds to pay about 80% of scheduled benefits.

 How does SSA calculate COLA

To determine the COLA, SSA calculates the percent change between average prices (CPI-W) in the third quarter of the current year (August and September) with the prior year’s third quarter(hence come up with a benefit formula).

Each primary insurance amount (PIA) will be adjusted by the benefit formula and truncated to the next lower dime.

Example

If the current PIA is $1,115 and is adjusted by an 8.7-percent COLA, the current PIA will be $1,985.

The fourth quarter is typically never used due to the absence of relevant data from the U.S. Bureau of Labor Statistics. This information is availed in mid-January clashing with the SSAs deadline of January 1.

SSA COLA

Social Security 2023 COLA

For the year 2023, the SSA (on October 13, 2022) adjusted the Social Security benefits by 8.7% (5.9% in the year 2022-biggest bump since 1982) – the fourth-biggest jump since 1975.

The 8.7% COLA was calculated by averaging inflation readings among the urban wage earners’ consumer price index (CPI-W) from July(8.5%), August(8.3%), and September(8.2%.).

To put things into perspective;

• The average monthly benefit for individuals from January 2023 will increase by $146, from $1,681 to $1,827.
• The average monthly benefit for couples from January 2023 will rise by $238, from $2,734 to $2,972.
• A retiree who received $10,000 in Social Security benefits in 2022, will receive an annual benefit of $10,870 in 2023.
• Maximum earnings (taxable maximum) subject to Social Security tax will increase from $147,000 to $160,200(extra $291 Social Security tax applied to the first $160,200).
• The earnings limit for workers who are younger than the “full” retirement age (67 years if born after 1960) will increase to $21,240 ($1,770 per month) from $19,560. Expect to have $1 of your benefits withheld for every $2 that you earn above the limit.
• The security benefits for individuals at “full” retirement age in 2023 will increase to $56,520 ($4,710 per month) from $51,960. Expect to have $1 of your benefits withheld for every $3 that you earn above the limit.

There is no earning test for workers who have reached “full” retirement age or older for the entire year.

COLA adjustment 2022

SSA increased the Social benefits by 5.9% through COLA in 2022. This was the largest one-time increase in 40 years (since 1981), and the largest experienced so far by living beneficiaries to date.

To put things into perspective;

• The average monthly benefit for individuals from January 2022 will increase by $92, from $1,565 to $1,657.
• The average monthly benefit for couples from January 2022 will rise by $154, from $2,599 to $2,753.
• A retiree who received $10,000 in Social Security benefits in 2021, will receive an annual benefit of $10,590 in 2022.
• Maximum earnings (taxable maximum) subject to Social Security tax will increase from $142,800 to $147,000.
• The earnings limit for workers who are younger than “full” retirement age (67 years if born after 1960) will increase to $19,560 ($1,630 per month) from $18,960 Expect to have $1 of your benefits withheld for every $2 that you earn above the limit.
• The security benefits for individuals at “full” retirement age in 2022 will increase to $51,960 ($4,330 per month) from $50,520 Expect to have $1 of your benefits withheld for every $3 that you earn above the limit.

There is no earning test for workers who have reached “full” retirement age or older for the entire year.

COLA adjustment 2021

The 2021 COLA adjustment was 1.3%, this translates into an approximate increase of $20 per month.

This is among the smallest increases ever, and the smallest since 2017

The lower adjustment was majorly caused by the Covid-19 Recession that moderated price growth.

To put things into perspective;

• The average monthly benefit for individuals from January 2021 will increase by $20, from $1,523 to $1,543.
• The average monthly benefit for couples from January 2021 will rise by $33, from $2,563 to $2,596.
• A retiree who received $10,000 in Social Security benefits in 2020, will receive an annual benefit of $10,130 in 2021.
• Maximum earnings (taxable maximum) subject to Social Security tax will increase from $137,700 to $142,800.
• The earnings limit for workers who are younger than the “full” retirement age (67 years if born after 1960) will increase to $18,960 ($1,580 per month) from $18,240. Expect to have $1 of your benefits withheld for every $2 that you earn above the limit.
• The security benefits for individuals at “full” retirement age in 2021 will increase to $50,520 ($4,210 per month) from $48,600. Expect to have $1 of your benefits withheld for every $3 that you earn above the limit.

There is no earning test for workers who have reached “full” retirement age or older for the entire year.

COLA adjustment 2020

Americans who rely on Social Security received a 1.6% (looks small but much better than 2010, 2011, and 2016 which got zero adjustments) bump in their benefits in 2020. This increase amounts to $24 a month for the average retired worker who receives a monthly check of $1,460.

To put things into perspective;

• The average monthly benefit for individuals from January 2020 will increase by $24, from $1,479 to $1,503.
• The average monthly benefit for couples from January 2020 will rise by $40, from $2,491 to $2,531.
• A retiree who received $10,000 in Social Security benefits in 2019, will receive an annual benefit of $10,160 in 2020.
• Maximum earnings (taxable maximum) subject to Social Security tax will increase from $132,900 to $137,700.
• The earnings limit for workers who are younger than the “full” retirement age (67 years if born after 1960) will increase to $18,240 ($1,520 per month) from $17,640.Expect to have $1 of your benefits withheld for every $2 that you earn above the limit.
• The security benefits for individuals at “full” retirement age in 2020 will increase to $48,600 ($4,050 per month) from $46,920. Expect to have $1 of your benefits withheld for every $3 that you earn above the limit.

There is no earning test for workers who have reached “full” retirement age or older for the entire year.

COLA adjustment 2019

Social Security benefits increased by 2.8 percent in 2019, the largest since 2012. As a result, more than 67 million beneficiaries saw an increase in their Social Security and SSI benefits.

This adjustment sees an increase in the average Social Security retirement benefit by $39 a month.

To put things into perspective;

• The average monthly benefit for individuals from January 2019 will increase by $39, from $1,422 to $1,461.
• The average monthly benefit for couples from January 2019 will rise by $67, from $2,381 to $2,448
• A retiree who received $10,000 in Social Security benefits in 2018, will receive an annual benefit of $10,280 in 2019.
• Maximum earnings (taxable maximum) subject to Social Security tax will increase from $128,400 to $132,900.
• The earnings limit for workers who are younger than the “full” retirement age (67 years if born after 1960) will increase to $17,640 ($1,470 per month) from $17,040.Expect to have $1 of your benefits withheld for every $2 that you earn above the limit.
• The security benefits for individuals at “full” retirement age in 2019 will increase to $46,920 ($3,910 per month) from $45,360. Expect to have $1 of your benefits withheld for every $3 that you earn above the limit.

There is no earning test for workers who have reached “full” retirement age or older for the entire year.

Bottom line

Social Security COLA helps by cushioning older Americans against inflation. Remember this benefit was designed in a way that it won’t be the only income in retirement.

In years where there is no Social Security COLA, or the Medicare Part B premiums rise faster than COLA, there is a likelihood that some retirees may receive a lesser benefit. The hold-harmless provision in the Social Security Act ensures the benefit amount does not decrease from one year to the next.

It does this by reducing the Medicare Part B premium instead hence the nominal value of the Social Security benefit remains the same.