Do You Understand These 5 Critical Facts About Social Security COLAs?

Key Points

• To determine the rate of inflation, the Social Security Administration compares CPI from the third quarter of the current year to CPI in the third quarter of the previous year.

• While it's rare, there have been years when no COLAs were given due to the lack of inflation.

• COLAs aren't just for retirees. Anyone who receives Social Security benefits is also eligible for COLAs.

• The $23,760 Social Security bonus most retirees completely overlook ›

The Social Security Administration's (SSA's) cost-of-living adjustment (COLA) helps beneficiaries keep pace with inflation. When inflation rises, a COLA can help recipients maintain their purchasing power, although that's not always the case. If you've always had questions about how COLAs work, here are five critical facts worth knowing.

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1. This is why COLAs are announced in October

Officials look to the Consumer Price Index, or CPI, to determine the inflation rate. However, they don't look at an entire year's worth of inflation data. Instead, the SSA focuses on CPI figures from the third quarter (July, August, and September) and compares them to the CPI figures in the previous year's third quarter. Since monthly inflation data is released two or so weeks after a month ends, the SSA must wait until the September data is available in October.

2. This is why COLA projections are often incorrect

Early COLA projections are based on guesses. For example, you may read that someone is predicting that the 2026 COLA adjustment will be 2.6%, which means little until the September data is released in October. Only when hard data is available can the SSA compare recent inflation to inflation in the previous year and come up with a final number.

3. An increase is not guaranteed

If the SSA finds that consumer prices increased between the previous year's third quarter and the current year's third quarter, an increase is announced. However, there is no COLA increase in the relatively rare situation in which the CPI stays flat or falls. In the 50 years since 1975, there have only been three years when the SSA determined no COLA was necessary: 2009, 2010, and 2015.

The most significant COLA increase since 1975 was a whopping 14.3% in 1980, driven by stagflation and the energy crisis. According to the SSA, retirees were hit with huge price increases on utilities and food during this time.

4. COLAs benefit people other than retirees

While those receiving Social Security retirement benefits see an increase in their monthly payments following a COLA increase, the adjustment also helps others, including but not limited to:

• Disabled people: Those who receive Social Security Disability Insurance (SSDI) also receive COLA adjustments.
• Survivors: Widows, widowers, and other beneficiaries of deceased workers who receive survivor benefits get a boost in their monthly checks following a COLA increase.
• SSI recipients: Those who receive Supplemental Security Income (SSI), money from a program designed for low-income elderly, blind, or disabled people, will also receive a larger monthly payment.

5. This is why it may not feel like COLAs are keeping pace

COLAs are backward-looking, meaning they don't measure what's going on now. Instead, they're based on what happened in the third quarter of the current and past years. What happened with inflation during that time may have little to do with what you're experiencing at the grocery store and gas station today.

Another reason it may not feel as if your COLA increases keep pace with reality is that COLA adjustments are based on the average inflation rate. The specific goods and services you consume may be more expensive than average.

There's no doubt there can be frustration following a COLA announcement. However, when prices are heating up, every little bit helps.

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