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 $794 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.