As inflation reduces people’s buying power, it can be difficult for people to afford living expenses like food, housing, and medical care. In response to rising costs, the government and some employers have implemented Cost of Living Adjustments (COLAs) that increases the amount of money you receive each month. In this post, we’ll explain what COLAs are, the types of COLAs, and answer common questions about these adjustments.
What is a Cost of Living Adjustment?
A cost of living adjustment (COLA) is an increase to your benefits or salary in response to rising costs of goods and services from inflation. COLAs can be provided by the government to people receiving benefits like Social Security and supplemental security income, or given by an employer to active or retired employees. COLAs are implemented to combat inflation and help people pay for living expenses as prices rise, which is especially important for retired or disabled individuals living on a fixed income.
Types of Cost of Living Adjustments
In general, there are two types of cost of living adjustments: Social Security/Supplemental Security Income and Employer Provided.
1. Social Security/Supplemental Security Income
The most commonly known COLA is for people receiving Social Security or Supplemental Security Income. In response to high inflation during the 1970s, Congress ratified a provision to offer yearly COLAs starting in 1975. Prior to that point, increasing Social Security benefits required new legislation to be approved. With the provision in 1975, COLAs were automatically granted based on the increase to the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). The way these COLAs are calculated has changed over time, but today, the adjustment is based on the third-quarter averages of the CPI-W for the previous and current year.
2. Employer Provided
Employers may also offer COLAs for active or retired employees in the form of additional benefits, wage increases, pension raises, or in response to specific situations like a relocation bonus for an employee who’s asked to move to a more expensive area. These COLAs will vary by employer, and some employers may not offer them at all, as there is no legal requirement to do so.
Does Everyone on Social Security Get a Cost of Living Adjustment?
Yes, anyone receiving Social Security benefits will receive a COLA increase, and the same applies for people on Supplemental Security Income. These increases are mandated by law, and intended to help people afford living expenses as costs go up due to inflation.
What’s the Cost of Living Adjustment for 2023?
The COLA for 2023 is 8.7%, and the next COLA will be announced in October 2023 and go into effect in January 2024.
How Do You Calculate a Cost of Living Adjustment Increase?
For Social Security and SSI COLAs, you can calculate your benefit increase by taking your monthly payment and multiplying it by the COLA rate. In 2023, the COLA rate is 8.7%, so if you’re currently receiving $1,500 a month from Social Security and the COLA rate for 2024 is the same amount (8.7%), you can multiply 1,500 by 1 + 0.087 to get your benefit amount for next year. In this example, 1,500 x (1+0.087)=1,630.5 which indicates your new benefit amount would be $1,630 per month, equivalent to $19,650 per year.
Employer provided COLAs are random unless otherwise specified in your contract or by the employer, so you may not be able to calculate them.
Can a Cost of Living Adjustment be negative?
Government provided COLAs for benefit recipients will never be negative. In a scenario where the CPI-W decreases (indicating costs of good and services went down), the next COLA will be zero, meaning your benefits will stay the same.