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COLA 101: How Social Security benefits keep up with inflation

Social Security benefits will increase in 2017, but not by much. The .3 percent benefit increase will translate into an average of $4 more per month for workers with disabilities and an additional $5 for retired workers.

Still, every dollar helps, and it's better than no increase at all, which was the case in 2016. On the other hand, some past years saw far more substantial increases. Why the difference? It all comes down to COLA - cost-of-living adjustment.

COLA History and Purpose

Until 1975, increases to Social Security only happened if Congress passed laws to do so. This changed with the 1972 Social Security Amendments: starting in 1975, Social Security recipients would see automatic increases to their benefits to reflect increases in their cost of living.

Why is this important? If you're depending on Social Security for part or all of your income, you need it to keep up with increasing costs of your expenses due to inflation. Making the increases automatic ensures your benefits will quickly adjust to keep up with inflation, rather than having to wait for lawmakers to act.

Measuring Cost of Living

The Social Security Administration calculates COLAs based on a common measure of changes in cost of living, the Consumer Price Index. The Bureau of Labor Statistics calculates the CPI based on a "market basket" of common goods and services. This "basket" includes everything from a gallon of milk to rent to a haircut.

The CPI - and the COLA based on it - might not perfectly capture your changing experience in a given year, but overall, it should provide some assurance that your Social Security benefits will keep pace with inflation.

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