What is a COLA (Cost of Living Adjustment)?
In one way or another, we’re all affected by inflation. Inflation is the increase of prices of goods over time. It causes you to have to spend more money to buy the same things, and is one factor that goes into the cost of living. For people who have a fixed income and live off of Social Security Income (SSI) and Social Security retirement benefits, inflation could pose a real problem.
To counteract inflation, the Social Security Administration (SSA) implements an annual cost of living adjustment (COLA). This ensures that the value of your Social Security benefits remains the same as the cost of living rises due to inflation.
In this post, we’ll help you understand how COLA is relevant to you in regards to your savings, Social Security benefits, and Medicare benefits.
Key takeaways:
The cost of living adjustment (COLA) is used to offset the effects of inflation on Social Security benefits.
COLA changes each year. The COLA in 2023 was 8.7% while the COLA in 2024 was 3.2%.
Medicare costs are not determined by COLA.
What is COLA
COLA stands for “cost of living adjustment.” COLAs are increases in Social Security and Supplemental Security Income that counteract inflation. COLAs are based on changes in the Consumer Price Index (CPI). The CPI is based on the average price of certain goods and is used to measure inflation.
COLAs affect different types of payments and monetary assets including government pensions, Social Security benefits, private salaries, and private retirement pensions. In this piece, we’ll be focusing specifically on how COLA impacts Social Security benefits.
How does COLA affect people who receive Social Security benefits?
A cost of living adjustment affects the benefits you receive each year. There’s a yearly percentage increase applied to your benefit amount for Social Security Income and Social Security retirement benefits.
Does everyone on Social Security get the COLA increase?
Yes, everyone who receives Social Security benefits will get the COLA increase on an annual basis. Inflation changes every year, so COLA ensures that your benefits don’t decrease in value.
What is the COLA for 2024?
In 2024, the cost of living adjustment is 3.2%. So, if you received $10,000 in Social Security benefits in 2023, your 2024 annual benefit would be $10,320. Your specific Social Security benefit will depend on a primary insurance amount (PIA), which you can learn more about here.
Here are the cost of living adjustments for the past three years. As an additional reference point, since 1975, COLAs have ranged from 0% to 14.3%.
How COLA affects your benefits if you claim Social Security retirement benefits early
The Social Security Administration (SSA) incentivizes retiring during your full retirement age, which is between 66 and 67 years old. If you claim Social Security retirement benefits before your “full retirement age” and you’re still working, you’ll have a reduced benefit amount, lower than your PIA. COLAs are applied to the PIA. This means your COLA percentage will be the same, but the amount will be lower because your benefit amount is lower.
How do you know what each year’s COLA is?
You’ll receive a COLA notice every year in the Message Center on your Social Security account. The information is also widely available online—a quick Google search for the year’s COLA will also give you the answer.
Does COLA affect Medicare premiums and deductibles?
The yearly COLA does not affect how Medicare premiums and deductibles are calculated. The SSA is responsible for determining yearly Medicare prices based on their own regulations, health care spending projections, and other policy factors. For example, from 2022 to 2023, the Medicare Part B premium decreased from $170.10/month to $164.90/month, while the COLA for 2023 was on the high side. Most other years, we see an increase in the Part B premium, regardless of the COLA.
If you have questions or need help with your Medicare costs, we’re here to help! Call a licensed Chapter Medicare Advisor who can see what options are available to get you the best coverage while minimizing your costs. Get in touch with us at 855-900-2427 or schedule a time to chat.