What is the cost of living adjustment?
Cost-of-living adjustments to social security and supplementary security income to offset the effects of inflation. Cost of living adjustments (COLAs) are usually equal to the percentage increase in the consumer wage index of urban wage earners and civilian personnel (CPI-w) over a specified period of time. For example, if Kevin received $10,000 in social security benefits last year, and this year's COLA is 4.1%, then his welfare this year will be $10,410.
Understanding cost of living adjustment (COLA)
In the 1970s, inflation was high. Therefore, compensation-related contracts, real estate contracts, and government benefits use COLAs to prevent inflation. The Bureau of Labor Statistics (BLS) has determined the CPI-W for the Social Security Administration (SSA) to calculate COLAs. The COLA formula is determined by applying the percentage of CPI-W growth from the third quarter of the year to the third quarter of the following year.
Congress approved a COLA clause to provide an automatic annual COLA based on the annual growth of the Consumer Price Index (CPI-W), which came into effect in 1975. Before 1975, Congress passed special legislation and social security benefits were raised. In 1975, Colas was based on CPI-W growth from the second quarter of 1974 to the first quarter of 1975. From 1976 to 1983, COLAs were based on the growth of CPI-w from the first quarter of the previous year to the first quarter of this year. Since 1983, from the third quarter of the previous year to the third quarter of this year, COLAs have relied on CPI-w.
The inflation rate in the 1970s was between 5.7% and 11.3%. In 1975, the growth rate of COLA was 8% and the inflation rate was 9.1%. In 1980, COLA reached an all-time high of 14.3%, while the inflation rate was 13.5%. In the 1990s, inflation rates fell sharply, prompting a small annual COLA to grow by an average of 2% to 3%. This situation continued until the early 2000s, when even lower inflation rates did not lead to an increase in COLA in 2010, 2011 and 2016. The COLA in 2019 was 2.8%.
The impact of COLA on the recipient
COLA relies on two components: the consumer price index and the employer's contract COLA percentage. The consumer price index determines the rate of inflation and compares it annually. When consumer prices fall, or if inflation is not enough to justify COLA prices, recipients will not get COLA. Without the increase in CPI-W, there would be no increase in COLA.
When the increase in COLA is not approved, the premium for Part B of Medicare remains the same for beneficiaries who deduct approximately 70% of the premium from social insurance checks. However, the remaining beneficiaries, such as those with higher incomes, those who do not participate in social security through employers and new beneficiaries, must pay an increase in premiums for Part B of Medicare.
Other types of COLA
Some employers, such as the US military, occasionally provide temporary COLA to employees who are required to perform work tasks in cities where their cost of living is higher than their hometown. When the task is completed, the COLA expires.