A Social Security COLA is a cost of living adjustment that increases recipients’ benefits to minimize the impacts of inflation. The most recent increase occurred in 2022, when the Social Security COLA increased by 8.7% for the 2023 year.
A Social Security COLA, or Cost of Living Adjustment, raises payouts for Social Security retirement and Supplement Security Income (SSI) recipients.
The Social Security Administration (SSA) reports that COLAs increase payouts by “approximately the product of the COLA and the benefit amount.” However, the exact computation is more complex.
Social Security benefits are determined using primary insurance amounts, or PIAs. The PIA is the amount a person would earn if they opted into Social Security at the “normal” retirement age.
The actual amount beneficiaries receive is based on a “benefit formula.” This formula adjusts the PIA based on retirement age and applicable offsets, like paying the Medicare Supplementary Medical Insurance premium. (Generally, taking Social Security early lowers your benefits, while waiting longer increases your benefit over your PIA.)
When Social Security COLAs come around, the adjustment directly increases the PIA. In turn, the new PIA is used to adjust benefit amounts for each recipient based on the benefit formula.
The SSA notes that, due to possible offsets and rounding down to the nearest dollar, monthly benefit increases may differ slightly from the COLA.
Social Security COLA calculations are based on the Consumer Price Index for Urban Wage Earners and Clerical Workers, or CPI-W. The CPI-W measures inflation based on spending changes in homes with income sourced from hourly wages and clerical work.
The SSA calculates annual COLAs by measuring CPI-W changes between Q3 of the prior year and Q3 of the current year. However, if inflation doesn’t increase, Social Security benefits may not go up, either.
If you rely on Social Security to supplement your retirement funds, that can leave you high and dry when you need it most. But even when COLAs do occur, they’re not meant to give beneficiaries a “raise.” Rather, they’re designed to provide inflation protection to help individuals maintain a consistent standard of living.
In 2022, a year of record-high inflation prompted the SSA to raise benefits by 8.7% for the 2023 year. The change was estimated to impact around 70 million Americans.
On average, the SSA projected that monthly benefits would increase by over $140 per month. The 8.7% bump topped the 5.9% increase beneficiaries enjoyed in 2022 – at that point, the highest in four decades.
Social Security benefits are a crucial component of many investors’ retirement strategies. However, the best retirement plan is one that includes Social Security income as a bonus – not a financial cornerstone.
If you’re ready to get a head start on building your own long-term wealth, working with an AI-backed investment service like Q.ai can set you on the right path.
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