Social Security’s COLA – What You Need to Know

The Social Security Cost of Living Adjustment (COLA) aims to preserve the purchasing power of Social Security benefits for seniors by adjusting for inflation. COLA is based on the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPIW) and is applied to benefits starting in January of the following year. The adjustment impacts retirement, disability, and survivor benefits, as well as Medicare premiums. Introduced in 1972, COLA allows for annual benefit adjustments without requiring congressional legislation. Recent trends show significant adjustments in 2022 and 2023 due to high inflation, with a more modest increase expected in 2024.

Transcript:Austin, we get a lot of questions about COLA or the Social Security Cost of Living Adjustment.There's a lot of interest, but also a lot of confusion.So my big question is, what do retirees need to know today?Yeah, let's just talk about the COLA program and how it's structured and maybe explain a little bit about the mechanics of it.So the primary goal of COLA is to preserve the purchasing power of Social Security benefits for seniors.And as the cost of goods and services rise due to inflation, which we've seen a lot the last few years, the cost of living adjustment or COLA ensures that recipients can maintain their standard of living.So this is supposed to be a dynamic adjustment that keeps pace with inflation.The way that's calculated is that the consumer price index for urban wage earners and clerical workers, or the CPIW, is what it is called as indexed off of.So it's based on the percentage increase in the CPIW from the third quarter of the prior year to the third quarter of the current year.And there is an adjustment formula.So there is an increase in the CPIW and the Social Security benefits are adjusted accordingly.So if there is no increase in CPIW, then there is no COLA for that year.But if there is an increase in COLA, it allows us to match it.So the way that it's implemented is that the calculated COLA based on this inflation takes effect in January of the following year.For example, the COLA determined in 2023 would be applied to the benefits starting January 2024.And, you know, the impact here on seniors.Let's look at the benefit amount.So the COLA affects retirement, disability and survivor benefits and ensures that these amounts are adjusted to reflect inflation.And again, to ensure that seniors can maintain their quality of life.And then for Medicare, the adjustment also affects Medicare premiums as some beneficiaries might see changes in their benefits due to these premiums.So for historical context here, COLA was introduced in 1972 to protect Social Security recipients from inflation, eroding their benefits.Sounds familiar, sort of where we are today.The 70s were a period of famously high inflation, and we're coming out, although we have decreasing inflation, it is still relatively high compared to prior decades.Before this, any increase in benefits required legislation from Congress.So this allows for benefits now to be adjusted every year to keep pace with inflation.So as far as some recent trends and things we're seeing here in 2024, although the COLA varies year to year based on inflation rates and periods of high inflation, in high inflation the adjustment is more significant.And we saw much more significant adjustments in 2022 and 2023 than are expected in 2024.And of course in low inflation periods, the increase is minimal or nonexistent at all.So let's just go through one final example so that people can visualize this.If the CPIW increases by 2% from one year to the next, Social Security benefits would also increase by 2%.So this means that if you're receiving $1,000 per month, a 2% Social Security COLA would increase your benefit to $1,020 per month.Now, we've also talked about the CPIW is the primary metric by which COLA is calculated here.But this may not accurately reflect the consumption patterns of the elderly.So there is also some discussion that the CPIW might be replaced by a new inflation gauge that is specific to seniors and the elderly.But that's certainly not going to happen this year.If we do see that, that will almost likely be in 2026 or 2027 COLA adjustment.

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