Social Security Administration (SSA) pays beneficiaries a retirement benefit based upon his or her lifetime earnings record. After the beneficiary claims Social Security retirement benefits, he or she receives that same monthly benefit until death. Only Social Security cost of living adjustment (COLA) increase the amount after the beneficiary’s retirement benefit is established by Social Security.
The COLA is considered one of the key features of each U.S. worker’s Social Security retirement benefit. With COLA, the monthly Social Security retirement benefit payment is inflation-indexed. If inflation rises, the beneficiary’s monthly payment rises, too. In comparison, most defined-benefit plans, such as pension plans, pay a permanently fixed amount per month and don’t take inflation into account.
Social Security 2017 COLA 0.3%
The Social Security Administration recently announced that in 2017 beneficiaries will receive a cost-of-living adjustment of 0.3 percent, after having received no increase for inflation in 2016.
Although the impact of inflation isn’t likely to dramatically impact an individual’s finances from year-to-year, COLA is an important consideration over a multiple decade retirement. Social Security beneficiaries can check benefits and payments online by creating a secure, free My Social Security account.
Social Security Cost of Living Adjustment -Keeping Up with Financial Necessities
Congress voted to index Social Security benefits for inflation in the early 1970s. At first, Congress was required to vote on each COLA adjustment. Effective in 1975, COLA automatically indexes Social Security beneficiaries’ payments for inflation. In inflationary periods, such as the 1970s decade, COLA helps retirees to pay for the things they need as costs increase.
COLA isn’t designed to increase or improve Social Security beneficiaries’ standard of living. Instead, the goal of COLA is to maintain purchasing power of calculated benefits during the beneficiary’s life time. For instance:
If inflation rises 3 percent a year over 20 years, the individual’s income would need to rise more than 80 percent just to maintain purchasing power.
If inflation rises 4 percent a year, the retiree’s income would need to increase more than 100 percent over years to maintain original purchasing power.
How Social Security Calculates COLA
SSA uses a formula to calculate COLA. The formula uses the Bureau of Labor Statistics’ third quarter (Q3) Consumer Price Index (CPI-W) and compares the figure to Q3 figure from the previous year:
If a positive difference exists between the Q3 CPI-W reports, Social Security beneficiaries receive COLA.
If the number isn’t greater or the figure is unchanged, beneficiaries don’t receive COLA.
SSA announces COLA each year, usually sometime in October.
If COLA is announced, it applies to Social Security benefits payable in December of the subsequent year.
The COLA increase, if any, depends on CPI-W. Since the 1980s decade, annual raises have been as much as +14.3 percent (1980) and as little as +1.3 percent (1998). COLA was +1.7 percent in 2015. In that year, the earnings threshold for Social Security tax rose to USD 118,500.
According to SSA, no COLA was announced for 2016 because there wasn’t an increase in CPI-W from Q3 2014 to Q3 2015. The maximum earnings threshold subject to Social Security tax also remained unchanged as well.
COLA and Social Security Earnings
Social Security retirement earnings benefits also adjust with COLA. For those beneficiaries less than Social Security Full Retirement Age (FRA) receiving Social Security benefits, it’s possible to earn as much as USD 15,720 (2015) before Social Security withholds benefits:
SSA subtracts USD 1 for each USD 2 earned above the USD 15,720 earned income limit before FRA. (FRA is assigned according to the beneficiary’s birth year.)
After beneficiaries reach FRA, earned income limits don’t apply.
How to Increase Social Security Retirement Benefits
COLA is important to retirees who receive Social Security retirement benefits. However, the easiest way to increase Social Security retirement benefits for a life is to keep working as long as possible before claiming them.
SSA uses the beneficiary’s highest 35 earnings years. No law restricts an individual from earning a salary or wages after claiming Social Security retirement benefits, but SSA reduces benefits if an individual claimed benefits before reaching FRA and continues to work.
If the beneficiary claims benefits and continues to work, he or she will continue to pay into Social Security. His or her employer will continue to deduct payroll taxes (FICA).
If the beneficiary hasn’t already claimed retirement benefits but adds a second job, self-employment, or higher paying primary income, it’s possible to increase Social Security retirement benefits later on.
Social Security Benefits for Spouses
Even if a Social Security beneficiary’s spouse hasn’t earned sufficient Social Security earnings credits to claim retirement benefits on his or her individual record, SSA will pay the spouse up to half of the primary worker’s benefit. However, Social security doesn’t automatically send the worker’s spouse a retirement benefit. It’s necessary to file a spousal benefits application with Social Security. Create or log into a My Social Security Account to file an application for spousal benefits when he or she celebrates a 62nd birthday. The spouse’s monthly retirement benefit from Social Security is also indexed for inflation.