retirement

What Is the Social Security COLA?

This year especially, cost-of-living adjustments are late to the party, as consumers are feeling the effect of price spikes now.

September 16, 2021

Getty Images

For 2021, Social Security benefits increased by 1.3%. That was the smallest cost-of-living adjustment (COLA) since 2017 — but consider that, initially, thanks to pandemic-induced price gyrations — retirees were looking at the prospect of no increase at all in 2021. As for 2022, seniors could get a significant increase in their benefits. In September, the Kiplinger Letter forecast that the annual COLA for Social Security benefits for 2022 would be 6%, the biggest jump since 1982, when benefits rose 7.4%

The estimated average monthly Social Security benefit payable in January 2021 increased from $1,523 in 2020 to $1,543 — that’s one Andrew Jackson. The average monthly benefit for a couple who are both receiving benefits rose $33, from $2,563 to $2,596. And the maximum Social Security benefit for a worker retiring at full retirement age increased from $3,011 per month to $3,148, an additional $137.

Also, more of workers’ income is subject to the Social Security tax in 2021. The Social Security tax will apply to the first $142,800 of earnings, up $5,100 from $137,700 in 2020.

COLAs are calculated using the Consumer Price Index for Urban Wage Earners and Clerical Workers (similar to, but not exactly the same as, the urban dwellers’ consumer price index used in inflation reporting). If prices don’t increase and even fall, the COLA is zero. That happened in 2010 and 2011, as the economy struggled to recover from the Great Recession, and again in 2016, when plummeting oil prices swept away any chance of a COLA for that year.

How Is the 2021 Social Security COLA Calculated?

As mentioned, any COLA adjustment is driven by changes in the wage earners’ consumer price index. National average prices are used, not regional. SSA also calculates the percent change between average prices in the third quarter of the current year with the third quarter of the previous year. The reason the fourth quarter isn’t used is because that number is typically not available from the U.S. Bureau of Labor Statistics until mid-January, and the SSA has to make its adjustment on January 1.