Cost of Living Adjustments (COLAs) are increases in the amount of benefits paid to claimants of Social Security benefits, including Social Security Disability benefits under Social Security Disability Insurance (SSDI) and Supplemental Security Income (SSI). COLA increases are intended to ensure that the purchasing power of Social Security Disability benefits is not eroded by inflation.
Social Security bases Cost of Living Adjustments on the Consumer Price Index (CPI), a measure of inflation produced by the Bureau of Labor Statistics. The CPI measures the average change of prices paid by urban consumers for consumable goods and services. The urban consumers used to measure this change represent about 87% of the total population of the U.S. The index measures expenditures not only of employed, well to do individual wage earners, but also the poor, the unemployed, the self-employed and the retired. Purchases measured by the Consumer Price Index include food and beverages, housing, clothing, transportation (including gasoline), medical care, recreation, education, communication, and miscellaneous purchases such as tobacco use, haircuts, and funeral expenses.
The Social Security Administration added Cost of Living Adjustment increases to Social Security Disability benefits each year from 1975 to 2008. There were no COLA increases the for 2009 and 2010. However, in 2012 there was a 3.6% Cost of Living increase. Prior to 1975, increases in Social Security benefits, including Social Security Disability benefits, were set by legislation.
The formula for calculating a COLA is found in the Social Security Act. For years in which a COLA is affected, the increase in Social Security benefits is equal to the average year-over-year quarterly percentage increase in the Consumer Price Index.
While a COLA increase may be very small (the smallest historical increase being only 0.3%), they can be significant for Social Security Disability recipients, especially those living on SSI. When your SSI income is $914 a month, the current rate for an eligible individual, something as small as a four dollar increase can mean the difference between affording a $4 Wal-Mart prescription and not having the money for that medication.
What Does COLA Mean?
In regards to the Social Security Administration (SSA), what does COLA mean? And what is a COLA? The acronym “COLA” stands for the SSA’s Cost-Of-Living-Adjustment. In 1973, legislation that accounts and provides for COLAs (a.k.a., adjustments in cost-of-living) was enacted. Thus, as one may infer, COLA refers to the adjustment made annually by the SSA to account for changes in the cost of living. COLAs are important because they enable both Supplemental Security and Social Security to keep in pace and line with inflation.
To calculate changes in the cost of living, the Consumer Price Index (CPI) is used. The Consumer Price Index (CPI) is a measure of inflation that is popularly utilized as a resource by policymakers, journalists, and economists. More specifically, the Consumer Price Index is an evaluation of the average change in prices in a fixed market basket of servers and consumer goods expended by urban consumers over time. A Consumer Price Index (CPI) that is on the rise is an indicator that consumer prices are also increasing. Conversely, a Consumer Price Index (CPI) that is on the decline usually means that consumer prices are decreasing. It is important to point out that consumer prices include the cost of living. As such, this relationship between the Consumer Price Index (CPI), consumer prices, and the cost of living provides a little bit more of an explanation supporting the reasoning behind the annual cost-of-living-adjustment (COLA).
But, once again, what does COLA mean? And what does COLA do? COLA revolves around accounting for increases in the cost of living in particular. Throughout a given calendar year, COLA illustrates the amount of monetary change in the cost of living as it pertains to a specific geographical area. The specific formula utilized in determining each COLA is established by the Social Security Act. In accordance with this specific formula, COLAs are established via increases in the CPI for both Clerical Workers (CPI-W) as well as Urban Wage Earners. Clerical Workers (CPI-Ws) are calculated by the Bureau of Labor Statistics on a monthly basis.
To answer the question—what does COLA mean?—let’s use the COLA adjustment for 2023 as an example. Between October 2021 and October 2022, the Consumer Price Index (CPI) increased 7.7 percent for All Urban Consumers. This 7.7% increase highlights the presence of inflation. And, because of this increase in the Consumer Price Index, the Social Security Administration (SSA) determined that the payment amounts for beneficiaries of Social Security Disability Insurance (SSDI) and Supplemental Security Income (SSI) must also increase to help ensure that these programs keep pace with the current state of inflation in the United States. As such, the SSA announced the latest 8.7 percent increase COLA on October 13, 2022. Said differently, the 8.7 percent COLA for 2023 means that the benefits paid to SSDI and SSI beneficiaries will increase by 8.7 percent beginning in December 2022 (in preparation for 2023).
Who Is Eligible For Social Security COLA?
Now let’s turn our attention to eligibility for Social Security COLA. More specifically, exactly who is eligible for Social Security COLA? The answer to this question is quite simple because it is the people who were, at the time of the SSA’s COLA 2023 announcement on October 23, 2022, currently beneficiaries of SSDI and SSI are eligible for the COLA 2023 increase in benefit payments.