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Q: I know that Social Security benefits typically increase annually, some years by more than others. How do they decide how much the benefits will go up by each year, if at all?
A: You’re correct – the Social Security Administration announces its Cost of Living Adjustment, or COLA, typically in October for the following year. For 2025, the recently announced increase will be 2.5%. Here’s some detail on how those COLAs are determined.
Social Security is a cornerstone of financial security for millions of Americans. One of the essential features of Social Security benefits is the annual Cost of Living Adjustment (COLA), which ensures that the purchasing power of benefits keeps up with inflation.
Let’s look at how COLA has evolved over the years.
The Origins of Social Security COLA
Social Security was introduced during the Great Depression, with the Social Security Act signed into law by President Franklin D. Roosevelt in 1935.1 Initially, the benefits were fixed and did not account for inflation. However, as the cost of living increased over time, the purchasing power of fixed benefits diminished, leading to the need for adjustments.
The first automatic COLA was implemented in 1975.2 Before this, Congress had to enact special legislation to increase benefits, which led to irregular and often inadequate adjustments. The introduction of automatic COLA was a significant reform designed to provide beneficiaries with predictable and regular benefit increases to match inflation.
How COLA is Calculated
The COLA is determined by the Social Security Administration (SSA) based on changes in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W).2 The CPI-W measures the average price change over time for a basket of goods and services consumed by urban wage earners and clerical workers.
The COLA calculation process involves comparing the average CPI-W for the current year’s third quarter (July, August, September) with the average CPI-W for the same quarter of the previous year.3 If there is an increase, the percentage increase is applied to Social Security benefits for the following year. If there is no increase or a decrease, benefits remain unchanged, ensuring that beneficiaries do not experience a reduction in nominal benefits even if deflation occurs.
Historical Trends in COLA
Over the years, COLA adjustments have varied significantly, reflecting different periods’ economic conditions and inflation rates.
Let’s explore some key periods in the history of Social Security COLA:
1970s
The late 1970s saw some of the highest COLA increases in history due to rampant inflation. The annual inflation rate doubled to more than 12% from 1969 to 1974.4 In 1980, the COLA was a staggering 14.3%, reflecting these high inflation rates.5
1980s to 1990s
The 1980s and 1990s witnessed more moderate and stable COLA increases. The economic policies implemented during these decades helped control inflation, resulting in more predictable and minor adjustments. For example, the COLA in 1985 was 3.1%, and in 1995 it was 2.6%.6 These adjustments mirrored the period’s lower and more stable inflation rates.
2000s
Significant economic events, including the dot-com bubble burst, the housing market collapse, and the Great Recession, marked the 2000s. These events influenced inflation and, consequently, COLA adjustments. In 2009 and 2010, there was no COLA increase due to negative inflation rates during the recession, reflecting the economic downturn.6
2010s to Present
In the post-recession era, the economy gradually recovered, but inflation rates remained relatively low. This period saw modest COLA increases, often around 1-2%. For example, in 2017, the COLA was 2%, and in 2020, it was 1.3%.6
Recently, COLA has been higher than in the late-2010s. In 2022, due to the inflationary impact of the global COVID-19 pandemic, the COLA was 8.7%. In 2023, it was 3.2%.6 And the COLA for 2024, as recently announced, will be 2.5%.
The Social Security Cost of Living Adjustment ensures that benefits keep pace with inflation, safeguarding the purchasing power of millions of Americans. COLA has evolved From the mid-1970s to today to reflect changing economic conditions and inflation rates.
Of course, deciding when you should file for Social Security (and when your spouse should file if you are married), is an important decision that should be made in conjunction with the rest of your retirement income planning. Please be sure to review your filing strategy with your financial advisors prior to making any final decisions.
Sources:
1https://www.ssa.gov/history/50ed.html
3https://www.ssa.gov/oact/cola/latestCOLA.html
4https://www.aarp.org/retirement/social-security/info-2020/colas-history.html
6https://www.ssa.gov/oact/cola/colaseries.html
This content is developed from sources believed to be providing accurate information and provided with the assistance of Twenty Over Ten. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information and should not be considered a solicitation for the purchase or sale of any security.
Jeremy R. Gussick is a Registered Representative with, and securities and advisory services are offered through LPL Financial, a Registered Investment Advisor, Member FINRA/SIPC.
Gussick & Barnett Financial Planning and LPL Financial are separate entities.
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