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For most retirees, Social Security is an indispensable source of income. In each of the last 23 years, Gallup has polled retirees to gauge their reliance on this crucial social program. Consistently, 80% to 90% of retirees have proclaimed their Social Security check to be a “major” or “minor” income source.
Considering how important Social Security income is to the financial foundation of retirees, it’s no surprise that the annual cost-of-living adjustment (COLA) is the most anticipated of all announcements. A fourth consecutive year of an above-average COLA means the program’s more than 68 million beneficiaries will receive a bigger check in the new year.Social Security’s cost-of-living adjustment is the tool the Social Security Administration (SSA) relies on to adjust benefits for inflation most years.
Hypothetically speaking, if the cost for a broad basket of goods and services that seniors regularly buy increases by 3%, Social Security checks should also rise by 3% to ensure no loss of purchasing power. COLA is the mechanism that takes these price changes into account and adjusts benefits accordingly.
Beginning in 1975, the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) became the inflationary measure used to calculate COLAs on an annual basis. The CPI-W has more than 200 different spending categories, each of which have their own respective weightings. It’s these weightings that allow the CPI-W to be whittled down to a single figure at the end of each month, which allows for simple year-over-year comparisons to determine whether prices are, collectively, rising (inflation) or falling (deflation).
Although the CPI-W is reported monthly, only readings from the third quarter (July through September) factor into the calculation. If the average third-quarter CPI-W reading in the current year is higher than the comparable period of the previous year, inflation has occurred, and benefits are set to climb. The amount benefit checks rise is simply the percentage increase in average third-quarter CPI-W from one year to the next, rounded to the nearest tenth of a percent.
