Cost of Living Adjustment (COLA)

COLAs are the increases in the amount of benefits that are provided to Social Security beneficiaries, this includes those receiving Social Security Disability Insurance (SSDI) and Supplemental Security Income (SSI) (SSI). COLA increases are meant to guarantee that Social Security Disability benefits retain their purchasing power in the face of inflation.

Cost of Living Adjustments are calculated by Social Security using the Consumer Price Index (CPI), is a measure of inflation that’s produced by the Bureau of Labor Statistics. The CPI is a price index that tracks the average change in the prices of consumable goods and services paid by urban consumers. The urban consumers used to calculate this change account for approximately 87 percent of the overall population in the United States. The index takes into account not only the expenditures of employed, well-off individuals, but also those of the impoverished, the unemployed, the self-employed, and the retired. Food and beverages, housing, clothing, transportation (including gasoline), medical care, recreation, education, and communication, as well as incidental items such as tobacco usage, haircuts, and funeral expenses, are all included in the Consumer Price Index.

From 1975 to 2008, the Social Security Administration increased Social Security Disability payouts annually through Cost of Living Adjustments. For 2009 and 2010, there were no COLA increases. However, in 2012, the cost of living increased by 3.6 percent. Prior to 1975, law established increases in Social Security payments, including Social Security Disability benefits.

The Social Security Act contains the formula for computing a COLA. For years with a COLA, the increase in Social Security benefits is equal to the Consumer Price Index’s average year-over-year quarterly percentage increase.

While COLA increases are often rather minor (the smallest rise in history was about 0.3 percent), they can be important for Social Security Disability beneficiaries, particularly those on SSI. When your SSI income is $794 per month, the current monthly amount for a qualified individual, even a four-dollar boost can mean the difference between being able to purchase a $4 Wal-Mart prescription and being unable to afford it.