COLA stands for Cost-of-Living Adjustment, which is determined by the Social Security Administration (SSA) annually as a means to counteract inflation. Every October, the SSA analyzes inflation rates and decides how much of an increase will be given to Social Security beneficiaries.

 

The COLAs History

In 1975, Congress ratified a COLA provision, which created automatic yearly increases based on any annual increases to the CPI-W (Consumer Price Index for Urban Wage Earners and Clerical Workers). Prior to 1975, Social Security benefits were only increased by special Congressional legislation.

If there is no CPI-W increase, there is no COLA increase, and recipients’ Social Security checks remain the same amount they were throughout the next year.

From Investopedia:

“Inflation levels ranged from 5.7% to 11.3% in the 1970s. In 1975, the COLA increase was 8%, and the inflation rate was 9.1%. In 1980, COLA reached the highest level in history at 14.3%, while the inflation rate was 13.5%.

During the 1990s, drastically lower inflation rates prompted small COLA increases averaging 2% to 3% per year. 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 2019 was 2.8%.”

 

The 2020 COLA

Per the SSA website, “Social Security and Supplemental Security Income (SSI) benefits for nearly 69 million Americans will increase 1.6 percent in 2020.” This means, the average claimant will receive an extra $23 per month or so. (The average claimant received around $1461 per month in 2019.)

 

COLA and Medicare Premiums

Approximately 70% of Social Security recipients have their Medicare premiums deducted from their Social Security checks. When there is no COLA increase, the premiums remain level, except for new Medicare enrollees and higher income retirees.

For 2020, Medicare Part B premiums, which cover doctor fees and outpatient services, are expected to increase by $8.80 to $144.30 a month. This means, the average net Social Security check may only increase by $14.20.

NOTE: Medicare Part B payments are prohibited by law from decreasing Social Security payments for existing beneficiaries, so a Medicare Part B premium hike can’t be more than your annual Social Security cost-of-living adjustment. This doesn’t apply to higher net worth people, however. Their premiums are higher based on their prior year’s tax returns, according to the Income Related Monthly Adjustment Amount (IRMAA).

 

The CPI-W (Consumer Price Index for Urban Wage Earners and Clerical Workers)

Some people feel that tying the CPI-W to the COLA amount doesn’t accurately cover the cost of inflation for retirees. For instance, seniors spend roughly twice as much than young urban workers on medical care, but the CPI-W doesn’t even use medical costs as one of the factors in its calculation. The disconnect between rising Medicare premiums and virtually stagnant Social Security benefits is one of the reasons that health-care costs top the list of retirees’ biggest fears.

Legislation has been introduced to establish a CPI-E, or Consumer Price Index for the Elderly, based on retiree’s actual spending habits. The CPI-E would de-emphasize transportation and food costs and give housing and medical costs greater weight.