RRA Educational Resources/Blog/Social Security & Cost of Living

Social Security & Cost of Living

The cost-of-living adjustment (COLA) to Social Security is an annual increase in Social Security benefits that is designed to help keep pace with inflation. The COLA is calculated based on the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W), which is a measure of the prices of goods and services that are commonly purchased by urban wage earners and clerical workers.

If the CPI-W increases from one year to the next, then Social Security benefits will also increase by the same percentage. However, if the CPI-W does not increase, then Social Security benefits will not increase either.

The COLA is typically announced in October and takes effect in December. The COLA for 2023 was 8.7%, which is the largest COLA since 1982.

How the COLA is Calculated

The COLA is calculated by comparing the average CPI-W for the third quarter of the current year to the average CPI-W for the third quarter of the previous year. If the average CPI-W for the current year is higher than the average CPI-W for the previous year, then the COLA is equal to the percentage increase in the CPI-W.

For example, the average CPI-W for the third quarter of 2022 was 281.901. The average CPI-W for the third quarter of 2023 was 301.236. This means that the CPI-W increased by 6.9% from 2022 to 2023.

How the COLA Affects Social Security Benefits

The COLA is applied to all Social Security benefits, including retirement benefits, disability benefits, and survivor benefits. The COLA also applies to Supplemental Security Income (SSI) benefits.

The COLA is applied on a percentage basis. This means that the amount of the COLA increase will vary depending on the amount of Social Security benefits that you receive. For example, if you receive $1,000 per month in Social Security benefits, then the COLA for 2023 would increase your benefits by $69 per month.

How the COLA Affects Your Retirement Planning

If you are planning for retirement, it is important to consider the impact of the COLA on your Social Security benefits. The COLA can help to ensure that your Social Security benefits keep pace with inflation. However, it is important to remember that the COLA is not guaranteed. If inflation rises at a faster rate than the COLA, then your Social Security benefits will not be able to keep pace with inflation.

When planning for retirement, it is important to factor in the COLA as well as other sources of income, such as savings, investments, and pensions. By having a diversified retirement income plan, you can help to ensure that you have enough money to live comfortably in retirement.

Here are some tips for retirement planning:

- Start saving early. The earlier you start saving for retirement, the more time your money has to grow.
- Save enough money to cover your basic living expenses. This includes the cost of housing, food, transportation, and healthcare.
- Have a diversified retirement income plan. This includes Social Security benefits, savings, investments, and pensions.
​- Review your retirement plan regularly. Make sure that your plan is still on track to meet your needs.

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