Every year, by law, Social Security recipients are eligible for a cost-of-living adjustment (COLA). The increase in benefits is designed to help beneficiaries keep up with rising prices. Retired workers receive the annual COLA from the Social Security Administration (SSA), as do survivors, those getting Social Security Disability Income (SSDI) and recipients of Supplemental Security Income (SSI) payments.
Although these beneficiaries are eligible for COLA increases annually, the amount of the increase can vary greatly from year to year — and there’s no guarantee of an increase in any given year.
How the Social Security COLA is calculated
SSA starts with the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W), an official measure of the monthly price change in a basket of goods and services, such as food, energy and medical care. The CPI-W is tracked by the U.S. Bureau of Labor Statistics (BLS). SSA then calculates the COLA by comparing the average of the CPI-W for July, August and September of the previous year with the average for the same three-month period in the current year. The percentage change is the COLA for the following year.
For example, in 2023, the third-quarter average CPI-W was 3.2 percent higher than it was in the third quarter of 2022. As a result, benefits will rise by 3.2 percent starting in 2024. The average monthly retirement benefit will increase from $1,848 to $1,907, and the average benefit for disabled workers will go up from $1,489 to $1,537, according to the SSA. The COLA amount is typically announced in October and takes effect the following January.
High inflation of 1970s led to annual COLAs
Until 1975, it took a new act of Congress each time Social Security benefits were increased. In the 1970s, however, soaring inflation was quickly eroding the purchasing power of fixed pensions and benefits. The annual rate of inflation doubled to more than 12 percent from 1969 to 1974.
Congress enacted the COLA provision as part of the 1972 Social Security Amendments, and automatic annual COLAs began in 1975. The first automatic Social Security COLA was 8 percent in 1975.
The 1975 COLA wasn’t the largest bump in Social Security history since automatic annual increases went into effect. That came in 1980, when benefits rose 14.3 percent; an 11.2 percent increase followed in 1981.
The first two decades of the 21st century saw mostly modest COLAs, averaging around 2 percent per year (with no benefit increase at all for 2010, 2011 and 2016). That has changed in the past two years amid surging prices, notably for food and fuel, resulting in the largest COLAs since the early 1980s — 5.9 percent in 2022 and 8.7 percent in 2023.
Mike Lynch, managing director for applied insights at Hartford Funds, notes that 2024’s 3.2 percent increase is more in line with the recent inflation trends than the 2022-23 spike.
“People may look at that lower number and say, ‘Well, what was it last year? Gosh, inflation is crazy,’ ” he says. “[The COLA] is the way to kind of control that. If you see it go down to 3, that’s a substantial decrease, but it’s not just a year-by-year perspective.”
John Waggoner covers all things financial for AARP, from budgeting and taxes to retirement planning and Social Security. Previously he was a reporter for Kiplinger's Personal Finance and USA Today.