How Social Security COLA is Calculated

As you are probably aware, each year your Social Security benefits can be increased by a factor that helps to keep up with the rate of inflation – so that your benefit’s purchasing power doesn’t decrease over time.  These are called Cost Of Living Adjustments, COLAs for short.  The increase for 2018 was 2.0% – and for 2019 the COLA is 2.8%.  But how are those adjustments to your benefits calculated?

## Calculating the COLA

There is an index, compiled and managed by the Bureau of Labor Statistics, called the Consumer Price Index for Urban Wage Earners and Clerical Workers, or CPI-W.  This index, or rather changes to the index, gauges the fluctuations in selected wages over time.  Each October, SSA looks at the CPI-W level for the third quarter of that year (averaging July, August and September), and compares it to the same level for the previous year’s third quarter.  The percentage of increase, if any, is then used as COLA for Social Security benefits.  This is an automatic process, no action is required by Congress to enact the increases over time. Also, being automatic, without passage of a law Congress can’t bypass an increase when the numbers warrant.

As an example, the CPI-W average for the third quarter of 2018 was 246.352, and for the same period in 2017 the average was 239.668. Comparing the two amounts we see that the CPI-W has increased by 6.684. Dividing this number by the 2017 average, we see that the increase year-over-year has been 2.788%, which is rounded to 2.8% for the COLA increase for 2019.

## How it’s Applied

So, simple enough, right?  We have the COLA, just multiply that by your benefit, right?  Not so fast there, calculator-breath.  Staying true to form, SSA has a more complicated method to determine what your benefit will be each year.

As we mentioned before in the article on Calculating the Social Security Retirement Benefit, when you apply for benefits affects your benefit permanently.  All benefit calculations begin with your Primary Insurance Amount (PIA), and are adjusted up or down depending on whether you apply for benefits after or before Full Retirement Age (FRA), correspondingly.

For example, if your Full Retirement Age is 66 and your PIA is \$2,000, but you’ve filed for benefits early at age 62, your actual benefit amount began at 75% of the PIA, or \$1,500.  The COLA is applied to your PIA, and then your reduction applied to that amount.  So for a COLA of 2.8%, your new benefit amount would be \$1,542 – calculated as PIA (\$2,000) times COLA (2.8%) equals \$2,056, times the reduction amount of 75%, for a total of \$1,542.