Cost Of Living Adjustments: What You Should Know

Many people receive a fixed amount of money each month or year as part of a retirement account, annuity or previous settlement. While having a steady stream of income can be nice, one problem is that rising prices can cause you to lose purchasing power. As the rate of inflation increases, the same dollar amount you received last month or last year may no longer buy the same amount of goods. Because of this, many programs that pay out regular monthly payments make regular cost of living adjustments.

When the rate of inflation rises, cost of living adjustments (COLAs) can help consumers maintain their purchasing power. Employers aren’t required to make cost of living adjustments, but retirees can count on annual increases from the Social Security Administration.

Who Receives Cost Of Living Adjustments?

There are many different types of programs that have COLAs. Social Security payments have an annual COLA that is tied to the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). The intent of these annual increases is to help make sure that retirees receiving Social Security have their benefits tied to a cost of living index.

Retirees are not the only people that may receive cost of living adjustments. Some beneficiaries of pensions, settlements or annuities may also receive cost of living adjustments, depending on how their payouts are structured. Some employees may also receive annual cost of living adjustments, either instead of or in addition to merit increases.

How Do Cost Of Living Increases Work?

The exact way cost of living adjustments work depends on who is issuing the COLA. Many employers and the Social Security Administration may calculate cost of living increases in slightly different ways.

In Your Salary

Most employers are not obligated to make COLAs. While it is common for many employers to give their employees annual wage increases, these COLA adjustments are usually not guaranteed and may be tied to your annual review rather than the rate of inflation. However, some employees may have annual COLAs mandated as part of their employment agreement. This may include active military that are deployed, other government workers or employees represented by a union.

Employers can calculate COLAs in a variety of different ways. One way is to look at the Consumer Price Index (CPI), which is a metric put out by the U.S. Bureau of Labor Statistics (BLS) on a monthly basis. The CPI measures how much consumers are spending on groceries and other consumer goods.

In Retirement

The Social Security Administration has a specific way that they calculate COLAs for Social Security benefits. The benefit increase is based on increases in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). The CPI-W is calculated on a monthly basis by the Bureau of Labor Statistics. The benefit amount will be given a COLA equal to the percentage increase (if any) in the CPI-W from the average for the third quarter of the current year to the average for the third quarter of the previous year.

These COLAs serve as a retirement benefit and can help retirees who are living on a fixed income. When you are planning for retirement, you may want to consider how cost of living adjustments will affect the amount that you get from Social Security each month. While you may not want to count on Social Security benefits as your only source of retirement income, it can be heartening to know that your monthly Social Security benefits will increase over time to keep pace with rising inflation.

Cost Of Living Adjustment FAQs

What is the COLA adjustment for 2023?

The Social Security Administration calculates the COLA increase each year based on the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). To calculate the COLA increase for both Social Security and Supplemental Security Income (SSI) benefits, you take the percentage increase in the CPI-W from the average for the third quarter of the current year to the 3rd quarter average of the previous year. The Social Security COLA was 8.7% for 2023, which was the largest COLA increase since 1981.

How do I calculate my annual COLA increase?

Calculating your annual COLA increase depends on what type of benefits and payments you receive. This is because COLA increases can be calculated differently, using different indices or calculations. The COLA increase for Social Security and SSI benefits is calculated based off the 3rd quarter values of the CPI-W index. That means that the official amount is announced each October, though various organizations estimate the expected amount of the COLA increase throughout the year.

How can I get a COLA increase?

If you are receiving Social Security or Supplemental Security Income (SSI) benefits, then you will automatically receive a COLA increase each year, starting with your January payment. For other benefits, your COLA increase may be calculated and assessed on a different schedule. For wages, you may have to contact your employer directly and negotiate a COLA increase, which may be issued instead of or in addition to any merit increase provided.

The Bottom Line: Cost Of Living Adjustments Can Maximize Your Buying Power

Many people receiving government benefits, pensions, annuities and other benefits receive a fixed amount of money each month. Some of these payments are indexed to inflation, meaning that a cost-of-living adjustment (COLA) is applied regularly. One of the most common COLAs is applied to Social Security and SSI benefits. Each year, these Social Security benefits are increased by a percentage that is calculated based off of the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W).

While the COLA associated with Social Security is the most common form, it is not the only one. Other programs or even employers may provide a cost-of-living adjustment or increase for certain payments, including wages. Each COLA increase may be calculated in a slightly different way, as a way to combat rising inflation.

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