How the COLA is calculated
The actual COLA will depend on the increase in the Consumer Price Index for Urban Wage Earners and Clerical Workers, or the CPI-W, an official measure of the monthly price change in a market basket of goods and services, including food, energy and medical care. The Bureau of Labor Statistics tracks both the CPI-W and its better-known cousin, the CPI-U — the Consumer Price Index for All Urban Consumers — which is a broader measure of retail prices.
The CPI-W rose 5.8 percent over the 12 months ended in August. In October, the Social Security Administration will compare the CPI-W for July, August and September 2021 with the CPI-W for the same period in 2020. The percentage change from last year's third quarter to this year's third quarter will be the COLA amount for the following year.
The COLAs for the past 10 years have averaged 1.7 percent, with increases ranging from zero in 2015 to 3.6 percent in 2011. The most recent year beneficiaries received a COLA of more than 5 percent was in 2008, when there was 5.8 percent increase.
Cost-of-living adjustments go into effect in January of the following year. Social Security publishes a complete chart of annual COLA increases.
Since Congress initiated automatic annual COLAs in 1975, there have been three years — 2009, 2010 and 2015 — in which benefits didn't increase at all. There is no COLA if inflation stays the same or declines year-over-year. The single biggest increase was 14.3 percent in 1980, which went into effect in January 1981.
Social Security is funded by a payroll tax of 12.4 percent on eligible wages — employees pay 6.2 percent and employers pay the other 6.2 percent (self-employed workers pay the entire 12.4 percent). Next year, the maximum amount of earnings subject to the Social Security tax, currently capped at $142,800, will also be adjusted for inflation. The money paid in by today's workers goes to cover current benefits, with any excess going into the Social Security trust fund.
You might not see all of the increase in your benefit payment. If your Medicare Part B premiums are deducted from your Social Security (as is the case with 70 percent of Part B enrollees), a Medicare rate increase could offset all or part of the COLA.
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 and has written books on investing and the 2008 financial crisis. Waggoner's USA Today investing column ran in dozens of newspapers for 25 years.