Social Security Cost-of-Living Adjustment (COLA)

The Social Security Cost-of-Living Adjustment (COLA) is an automatic annual increase applied to Social Security and Supplemental Security Income (SSI) benefits to help protect recipients against the eroding effects of inflation. The COLA is calculated based on the percentage increase in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) from the third quarter of the prior year to the third quarter of the current year.

COLAs have varied significantly over the years. In years of low or negative inflation, the COLA may be 0% — benefits do not decrease in nominal terms even if prices fall. In recent years with higher inflation, COLAs have been more substantial, such as the 8.7% increase for 2023 and the 3.2% increase for 2024. The COLA for any given year is announced in October of the prior year.

While COLAs help maintain purchasing power, many retirees find that their actual expenses — particularly healthcare costs — may rise faster than the CPI-W measure used for the COLA calculation. The CPI-W is based on the spending patterns of working-age urban consumers, which may not perfectly reflect the spending patterns of retirees. Some researchers have advocated for using an experimental index called the CPI-E (Consumer Price Index for the Elderly), which gives greater weight to healthcare and housing costs.

The interaction between COLAs and other factors is worth understanding. Medicare Part B premiums, which are typically deducted from Social Security checks, can increase and partially offset the COLA. A "hold harmless" provision protects most beneficiaries from having their Social Security check decrease due to Medicare premium increases, but this protection does not apply to all beneficiaries.