In 1975 when inflation in the United States was high and retirees were having a tough time maintaining their standard of living, the government implemented the annual Cost of Living Adjustment, or COLA.
This cost of living increase is meant to raise fixed incomes that come from government sources such as Social Security (SS) or Supplemental Security Incomes (SSI) in order to protect recipients from a decline in purchasing power.
While COLAs are mandatory on an annual basis, that does not guarantee a benefit increase every year. This is because COLAs are based on inflation levels in the U.S. Since 1975 benefit COLAs have been paid every year except 2010, 2011, and 2016. In 2019 the COLA was 2.8 percent, the largest adjustment in the past 7-year period.
How is the the Cost of Living Increase Calculated?
COLAs are based on inflation rates in the United States. They are automatically calculated by using the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W), which is how the U.S. government determines inflation. The Consumer Price Index follows the price fluctuations of 80,000 goods and services provided in this country. If prices rise, COLAs are made, and they are equal to the percentage of increase in the Consumer Price Index.
Some people argue that even with a decent annual COLA, the purchasing power of seniors may not be improving as much as it should. This is probably because the CPI-W is based on how urban and clerical workers spend their money. Seniors’ spending habits can be different. They spend a higher percentage on housing and medical care than urban and clerical workers generally do, and these costs are not represented equally in the CPI-W.
Do Cost of Living Increases Affect Medicare Premiums?
If you are one of the 70 percent of Americans whose Original Medicare Part B premiums are automatically withheld from their monthly Social Security benefits, you may be affected by COLAs.
If there is no COLA increase, or only a very small increase, your Medicare Part B premium will not increase. It will remain the same as the previous year. The remaining 30 percent whose premiums are not automatically withheld from SS benefits must pay the Medicare Part B premium increase.
This protection exists thanks to a hold-harmless provision which ensures that a beneficiary’s net benefits do not decrease because of a Medicare Part B premium increase.
For people who have a Medicare Part D drug prescription policy, their benefits may decrease due to increased premiums because the hold-harmless provision does not apply in these cases.
Who is Eligible for a Cost of Living Increase?
Recipients of Social Security are not the only beneficiaries of COLAs. Those who receive Supplemental Security Incomes and tier 1 Railroad Retirement Board benefits receive the same increase. For tier 2 Railroad Retirement Board beneficiaries, the percentage of the SS COLA is smaller. Veterans’ pensions require legislation before receiving COLA.