Social Security Cost of Living Adjustment (COLA)


People receiving Social Security general benefits have increases in their payments based on the Consumer Price Index (CPI). They are called Cost-Of-Living Adjustments or COLA. The U.S Congress made COLA increases a provision of the Social Security Amendments in 1972. Automatic COLA increases started in 1975. Prior to this, an increase in benefits only happened if Congress signed special legislation into law.

Purpose

The purpose of COLA is to make certain the purchasing power of people receiving Social Security and Supplemental Security Income (SSI) is not drastically decreased by economic inflation. The amount of the increase is determined by the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). This is the law. The increase is based on the third quarter statistics of the current year. If this index shows no increase, there is no COLA. Social Security benefits increased 1.7 percent in 2015. During the three previous years, COLA increased less than 2 percent. There will be no increase in Social Security benefits in 2016. According to the Social Security Administration, inflation was down 0.6 percent. The reason given is because gas prices dropped approximately 30 percent.

History

The first automatic COLA occurred in 1975. It was based on the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). The statistics used were from the second quarter of 1974 to the first quarter of 1975. COLA increases in 1976 to 1983 were based on the first quarter of the previous year to the same quarter of the current year. Since 1983, COLA has been determined by using the increases of the CPI-W from the third quarter of the previous year to the same quarter in the current year.

Problems

The biggest problem with COLA is how it measures inflation rates. It does not adequately demonstrate how people receiving Social Security spend their money. Many social security recipients do not benefit from lower gas prices and other price decreases. These individuals often do not drive to and from work. They also drive less than the average consumer. Medical costs have increased at a higher rate than overall inflation. Spending on health care is taking a larger percentage of a Social Security recipients income.

COLA Computation

Each individual receiving Social Security has their benefits determined by using a primary insurance amount, which is also known as PIA. A person's COLA is based on their PIA. This is determined by the earnings of a primary beneficiary using a benefits formula. A person's PIA is what increases with a COLA. The results of the benefits formula will be truncated to the next lower dime. When a person's retires prior to their normal retirement age, their benefit will be less than their PIA. When a person retires at the normal retirement age, their benefit will be more than their PIA.

Determining COLA

To determine COLA rates, a factor is given to the PIA accounts of individuals receiving Social Security benefits. The result of this calculation is truncated to the next lower dime. The benefit offsets are then applied. These offsets could include the premiums paid for Medicare Supplementary Medical Insurance (SMI) and others. The result from this calculation is truncated to the next lowest dollar. When a COLA is provided, the PIA is increased, and the steps are repeated to calculate a new payment amount based on the higher PIA. The new payment amount may be different than the COLA because of the offsets and final truncations.

Geographic Location

The amount of COLA a person may receive could be tied to their geographic location if they move. An expatriate will probably see the discretionary income portion of their benefits indexed by a different CPI.