What is COLA?

COLA stands for Cost of Living Adjustment. This is utilized by SSA in order for retirement, disability and SSI benefits to keep up with inflation. As the cost of living rises, so must the benefits of retirement, disability and SSI recipients so they can still afford their food, medical care and rent.

COLA was enacted in 1973. It consists of a formula that is used to calculate what the COLA adjustment for the year should be. It is based on increases in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). The CPI-W is calculated by the Bureau of Labor Statistics each month.

SSA must use the average CPI-W for the third quarter of the last COLA year to calculate the next year’s COLA. The last year a COLA was issued was 2011. Therefore, SSA used CPI-W from the third quarter of 2011, which was 223.233. Since it is lower than the CPI-W from the third quarter of 2012, which was 226.936, there is a 1.7% difference between the two numbers. This is the COLA for 2013. If there is an increase, it must be rounded to the nearest tenth of one percent. If there is no increase, or if the rounded increase is zero, there is no COLA.

COLA’s become active in December because those benefits are payable in January of the following year.

COLA has also been scrutinized over the years as members of Congress and others have tried to devise a better system for beneficiaries to keep pace with the cost of living. Instead of using the CPI-W as the base for figuring COLA, the CPI for All Urban Consumers (C-CPI-U) has been proposed to be used.

The C-CPI-U, which has been measured monthly by the Bureau of Labor Statistics since 2002, measures the price of a basket of goods that changes in response to the relative price shifts of various goods. For example, if a raise in the cost of beef causes people to buy more chicken, then the C-CPI-U would have a higher weight on its chicken component and a lower weight on its beef component.

Dean Baker, a co-director of the Center for Economic and Policy Research, stated:

“If it (the C-CPI-U) were adopted as the basis for indexation, then benefits would fall by 0.3 percentage points each year compared to the current law. This lower adjustment would accumulate through time so that after 10 years, beneficiaries would be seeing Social Security checks that are 3 percent smaller, after 20 years 6 percent, and after 30 years would be 9 percent smaller.”

Baker goes on to say that because Social Security beneficiaries have substantially different consumption patterns compared to other Americans, an Elderly Index (CPI-E) has been considered for use instead of the CPI-W. Healthcare and housing make up the greatest part of a Social Security beneficiary’s consumption, and elderly people in particular have fewer opportunities for substituting across items to take advantage of changes in relative prices. They are also less mobile which also causes problems as far as being able to substitute.

Baker concludes his statement by saying an “honest discussion” would be necessary to determine the best route for calculating future COLA. If the C-CPI-U would be used, it would be a dishonest way to cut benefits as those who would be hit the hardest are the oldest beneficiaries. They also tend to be the poorest. Overall, the ability for every American to be able to afford their food, housing and medical care is a critical need that must be handled carefully, so no one is left out in the cold.

Written by Anna Westfall


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