Right now, nearly 62.5 million people are receiving a Social Security benefit check each month. Around 70% of these folks are retired workers, and of these aged beneficiaries, just over three out of five rely on the program to provide at least half of their monthly income. To say Social Security plays a vital role in building a financial foundation for seniors, the long-term disabled, and the survivors of deceased workers, would probably be an understatement.
But Social Security has transformed quite a bit through the years in the process of becoming the program we know today. For example, when the Social Security Act was signed in 1935, it didn't cover dependents, survivors, or those with long-term disabilities. The former two groups were included after amendments to the law made in 1939, while people with disabilities became eligible for benefits following the amendments of 1956.
However, one of the most interesting evolutions to Social Security has to be the cost-of-living adjustment, or COLA.
Here's how COLA works today
Think of COLA as nothing more than the "raise" that beneficiaries receive most years that corresponds with the inflation (i.e., the rising price of goods and services) that beneficiaries are facing. Currently, the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) is the tether that the Social Security Administration uses to measure inflation. Of course, there are some quirks.
For instance, only the CPI-W readings from the third quarter count. The average reading from the third quarter of the previous year (July through September) serves as the baseline figure, while the average reading from the third quarter of the current year is the comparison. If the average rises year-over-year, as it's done in each of the past 43 years, save for 2010, 2011, and 2016, a COLA is passed along that corresponds with the year-over-year CPI-W percentage increase, rounded to the 0.1%. Should prices fall, in what's known as deflation, benefits remain static from one year to the next. Deflation, thankfully, can't reduce what the SSA pays beneficiaries each month.
This system for measuring and passing along COLA has been in place since 1975, following legislation that was passed in 1972 under the Nixon administration establishing the procedures for issuing automatic annual COLAs. But before 1975, things looked a lot different.
Three-plus decades of congressional dart-throwing
Between Jan. 1, 1940, the date Social Security's retired worker benefits began, and the implementation of automatic annual COLAs in 1975, there wasn't a set system for passing along raises to beneficiaries to account for inflation. The only time benefit increases were given to beneficiaries was when Congress passed special legislation specifically for that purpose. In the 35-year stretch between 1940 and the 1975, lawmakers voted to increase Social Security benefits just 11 times.
Think about this for a moment. Since 1975, the CPI-W has been relied on to provide a somewhat accurate measure of inflation that determines what sort of raise beneficiaries will receive in the upcoming year. Since 1992, Social Security's annual COLA has been equal to or higher than 3.5% just four times. But between 1940 and 1972, Social Security's raise was a double-digit percentage seven out of nine times.
You see, there was little rhyme or reason as to when Congress would pass along this special legislation to increase Social Security benefits. The health of the U.S. economy and the inflation rate more or less determined the need for lawmakers to act. For instance, extremely high levels of inflation in the early 1970s coerced lawmakers to increase benefits by 15% in January 1970, 10% in January 1971, and 20% with the legislation of 1972. Could you imagine receiving a double-digit COLA for three consecutive years?
The wildest Social Security raise in history
But if you think that's something, then you have to take a gander at what I'd refer to as the craziest COLA in Social Security's history.
Following the creation of Social Security in 1935, and the first payout on Jan. 1, 1940, not a single cost-of-living adjustment was given to beneficiaries until the Amendments of 1950 were passed. In case you're just skimming, I'm going to go ahead and repeat this point: For more than a decade, Social Security beneficiaries received the same monthly payout without an increase.
As you can imagine, going more than a decade with a fixed retirement benefit allowed inflation to take its toll on early recipients. In response, the Amendments of 1950 passed along what will almost assuredly stand as the largest COLA in history. As of September 1950, recipients received a 77% increase to their monthly payout. This was soon followed by a 12.5% hike in September 1952, and another 13% in September 1954. After more than a decade of inflationary erosion, those who happened to receive a benefit during the 1940s and though the mid-1950s suddenly saw a 125% aggregate increase to their payout in a span of only four years.
Long story short, despite the CPI-W's flaws we should be thankful there's a straightforward method of passing along COLAs today, because congressional dart-throwing prior to 1975 was nothing short of a financial roller coaster.