Social Security benefits are adjusted for inflation. This adjustment is known as the cost of living adjustment (COLA). For the program’s initial nearly four decades, benefit amounts did not increase based on higher living costs. The inflation of the 1970s, which was particularly hard on seniors with fixed incomes, prompted the Social Security Administration (SSA) to modify the program so inflation would trigger increases in benefit amounts.
How the COLA Began
The SSA enacted the cost of living adjustment in 1972. The removal of the dollar from the gold standard, rising oil prices, supply shocks and other factors had triggered unprecedented inflation that would plague the remainder of the decade. While workers received some relief from rising prices, since their wages also climbed, seniors on fixed incomes struggled badly. The COLA was a necessary addition to Social Security to ensure that beneficiaries with no other sources of income could still make a living.
How the COLA Is Determined
The COLA is based on the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). This index measures what workers with modest incomes pay on average for retail goods. When the CPI-W increases by more than 0.1% from one year to the next, the SSA makes a COLA to the Social Security program accordingly. During years when the CPI-W increase is nominal or negative, Social Security recipients receive no COLA.
On Jan. 1, 2015, recipients received a cost of living adjustment of 1.7% over their 2014 benefit amounts.