Although the future is unpredictable, there are some things we can generally say with confidence. One is that prices are likely to rise over time, meaning the cost of living will rise as well. Inflation affects those in the workforce, and it particularly impacts anyone who’s in retirement and living on a (relatively) fixed income. The good news for those relying on Social Security is that the federal government uses cost of living adjustments (COLAs) in order to keep up with these increases. And employers will also consider increases in the cost of living as they adjust salaries.What Is a Cost of Living Adjustment (COLA)?
Broadly speaking, a cost of living adjustment, or COLA, is a change to a recurring payment such as a retirement benefit or salary that reflects a concurrent shift in the cost of goods and services. The details of every COLA will depend on the type of payment they’re affecting.
Perhaps the most notable COLA is the one that takes place annually impacting Social Security retirement benefits and Supplemental Security Income (SSI). The Social Security Administration (SSA) makes this adjustment in the third quarter of every year. This makes sure that Social Security recipients have the same amount of purchasing power year over year.
Another type of COLA is used by employers. If you work at a company that offers annual raises, you may have a COLA included in them, or at least considered when the employer establishes raises for its employees. You could even think of rising tuition prices at universities as a form of a COLA, albeit one that’s in favor of the university’s income rather than yours. No matter the form they take, gradually rising prices and inflation are facts of life, which COLAs exist to counteract.How Are Cost of Living Adjustments Calculated?
It’s important to note that not all COLAs are calculated in the same way. At your job, for instance, your employer can calculate its adjustment however it sees fit. Some COLAs, especially those that are applied to government benefits, have consistent methodologies.
The cost of living adjustment that the SSA implements for Social Security and SSI is derived from a variation of the Consumer Price Index (CPI) called the Consumer Price Index For Urban Wage Earners And Clerical Workers (CPI-W).
The CPI is a metric used by the Bureau of Labor Statistics (BLS) to measure prices on more than 80,000 goods and services. The BLS looks over all of these goods and services and distills the price into a single number to come up with the CPI.
There are a few different variations of the CPI, and the CPI-W is one of them. This version specifically looks at prices that impact certain demographics. Specifically, it considers households where at least 50% of the household income comes from clerical or wage-paying jobs and at least one of the household’s earners has been employed for at least 70% of the year.
COLAs for Social Security and SSI adjust by taking the CPI-W from the third quarter of the previous year and applying it in the third quarter of the current year. For example, the CPI-W rose 2.8% in the third quarter of 2018. In turn, Social Security recipients will see a 2.8% increase in benefits in the third quarter of 2019. If the CPI-W doesn’t increase for whatever reason, then there won’t be a COLA for that quarter.How Do I Find Out How Much My COLA Will Be?
If you receive Social Security payments, you are likely curious about what kind of increase to expect. The federal government releases its COLA amounts and methodology online through the SSA’s website. The SSA updates this information regularly, so feel free to check back as often as you’d life.
For employees wondering if their company offers COLAs, check with your direct supervisor or human resources department for more information. Because COLAs are calculated differently on a company-to-company basis, there’s no telling what you may or may not be in line to receive.Bottom Line
Inflation is a normal part of any healthy economy, but if your income doesn’t keep pace with it, you’ll lose purchasing power. COLAs are intended to ensure that your purchasing power doesn’t dwindle. The Social Security Administration uses COLAs to ensure that its retirement benefits retain their value, and some employers also use them to keep employees’ salaries fair.
If you still have question about COLAs, Social Security, retirement planning or any other related topic, try consulting with a financial advisor.Tips for Navigating Social Security
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