What Is a Cost-of-Living Adjustment (COLA) and How Does It Work?

What Is a Cost-of-Living Adjustment (COLA)?

A cost-of-living adjustment (COLA) is an increase made to Social Security benefits and Supplemental Security Income (SSI) to counteract the effects of inflation and rising prices in the economy.

COLAs are typically equal to the percentage increase in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) for a specific period. The Consumer Price Index (CPI) represents the average prices of a basket of goods and is used to measure inflation.

The COLA was 3.2% for 2024. Someone who received $10,000 in Social Security benefits in 2023 would see their 2024 annual benefit increase to $10,320. The COLA for 2025 is 2.5%, meaning that someone who received $10,000 in 2024 benefits would receive $10,250 the following year.

Understanding the Cost-of-Living Adjustment (COLA)

Inflation was high during the 1970s so compensation-related contracts, real estate contracts, and government benefits used COLAs to protect against inflation. The U.S. Bureau of Labor Statistics (BLS) determines the CPI-W that the Social Security Administration (SSA) uses to compute COLAs. The formula applies the percentage increase in the CPI-W from the third quarter of one year to the third quarter of the following year. This information is updated regularly on the SSA website.

Congress ratified a COLA provision to offer automatic yearly COLAs based on the annual increase in the CPI-W that went into effect in 1975. Social Security benefits were increased when Congress approved special legislation before 1975. COLAs were based on the increase in the CPI-W from the second quarter of 1974 to the first quarter of 1975 in that year.

They were based on the increases in the CPI-W from the first quarter of the previous year to the first quarter of the current year from 1976 to 1983. COLAs have been dependent on the CPI-W from the third quarter of the previous year to the third quarter of the current year since 1983.

Inflation levels ranged from 3.3% to 11.3% in the 1970s. The COLA increase was 8% and the inflation rate was 9.1% in 1975.

Drastically lower inflation rates prompted small COLA increases averaging 2% to 3% per year during the 1990s. That continued into the early 2000s when even lower inflation rates resulted in no COLA increases at all in 2010, 2011, and 2016.

The COLA for 2023 was 8.7%, due to the 8% inflation levels witnessed in 2022. The COLA fell to 3.2% in 2024 and dropped again to 2.5% for 2025.

How COLA Is Determined

COLA is reliant on two components: the CPI-W and the employer-contracted COLA percentage. CPI determines the rate of inflation and is compared yearly. Recipients don't receive a COLA when consumer prices drop or if inflation hasn't been high enough to substantiate a COLA increase. There's no COLA increase if there's no CPI-W increase.

Hold-Harmless Provision

The hold-harmless provision in the Social Security Act prevents the benefit amount for some Social Security beneficiaries from decreasing from one year to the next if there's an increase in their standard Medicare Part B premiums. The Part B premium will be reduced to ensure that the nominal value of the Social Security benefit will be the same if the increase in Part B premiums causes the beneficiaries' Social Security amount to be less.

Few individuals are typically held harmless but they may be impacted by this provision in years where there's no Social Security COLA. There was a 2% Social Security COLA in 2018 and 28% of Part B enrollees were held harmless. There was virtually no COLA in 2016 and 70% of enrollees were held harmless from the Part B premium increase.

Other Types of COLAs

Some employers such as the U.S. military occasionally give a temporary COLA to employees who are required to perform work assignments in cities with a higher cost of living than their home city. This COLA expires when the work assignment is completed.

The Bottom Line

Social Security and Supplemental Security Income are both subject to cost-of-living increases. The idea is to provide an increase in benefits equal to the pace of inflation. The COLA increase for 2025 is 2.5%, a sharp drop from the 8.7% COLA in 2022. There was no adjustment in 2009, 2010, or 2015.