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Social Security and the Cost of Living

Social Security and the Cost of Living

Cost of Living Adjustments (COLAs) weren’t really a part of the social consciousness until inflation raged in the 1970s. Everyone has a basic understanding of what inflation is and how it can make the simplest things in life cost more money. But the reality is that if the cost of things we need (food, shelter, clothing, etc.) increases, but our income does not, we will lose money steadily just by trying to survive.

Our ability to pay for the things we need is sometimes referred to as purchasing power. If our income does not keep up with price tags, we lose purchasing power. People dependent on Social Security for income are particularly vulnerable to diminished purchasing power, which is why Congress decided to amend the Social Security Act in 1972. Prior to that amendment, monthly benefit payments only increased when Congress enacted special legislation. Starting in 1975, cost of living adjustments are made to beneficiaries’ monthly payments automatically if inflation increases.

Although there was no COLA in 2016, there have been small increases each year since then. In 2020, the COLA is 1.6%, which means the average retiree will receive an additional $24.00 per month with every monthly benefit payment for an average total of $1,503.00 per year. This number is smaller than the adjustment for 2019, which was 2.8% and resulted in an additional $40.00 per month.

While it is true that any increase is better than none at all, it is important to remember that COLAs rarely keep pace with increased living expenses. How are the amounts determined? The COLA is based on increases in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) from the third quarter of ever year. That means the only months that factor into determining the COLA are July, August, and September. If inflation does not rise during those three months, it doesn’t matter what happens in the other nine—there will be no COLA.

The CPI-W takes into account eight major spending categories: transportation; medical care; recreation; food and beverages; apparel; housing; education and communication; and other goods and services.

When it comes to health care, however, COLAs do not track exponential expenses facing older Americans because citizens are living longer, and medical care at every level is growing more costly, specifically with respect to the cost of medical procedures and prescription drug prices. In 2017 alone, the cost of drug prices increased by twice the rate of inflation.

Despite the modest increase, the 2020 COLA will affect millions of Americans, 69 million Americans to be exact, the combined number of beneficiaries of Social Security retirement and Supplemental Security Income benefits. As more people retire with fewer people paying into Social Security, we can only hope that COLAs continue, minimal though they may be.