If you're on Social Security, you probably have at least a basic idea of what cost-of-living adjustments (COLAs) do. They're designed to give your checks a boost each year, though the amount you get varies depending on the size of the COLA and the size of your checks.
You might think that's all there is to know about COLAs, but you'd be surprised. Here are three lesser-known details worth filing away in your memory bank.
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1. COLAs aren't guaranteed
You hear about a COLA nearly every year, so it's understandable if you assume that Social Security recipients get them every year. But that's not true.
The Social Security Administration uses data from the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) to calculate each year's COLA. The CPI-W measures the cost of a basket of goods and services. By taking the third quarter CPI-W from the current year and comparing it to the previous year's figure, any increase becomes the COLA the following year. For 2024, the COLA will be 3.2%.
But sometimes, there isn't a year-over-year change in the CPI-W. When this happens, there's no COLA for the following year. That said, this has only happened three times since Social Security began offering COLAs in 1975 -- in 2009, 2010, and 2015 -- so it's a pretty safe assumption that there will be a COLA in most years unless inflation is especially low.
2. They don't always keep up with inflation
The stated purpose of COLAs is to help seniors' Social Security checks keep up with inflation so they maintain the same buying power over time. Unfortunately, this isn't how it plays out in practice.
Social Security benefits have actually lost about 40% of their buying power since 2000, according to the Senior Citizens League. As a result, seniors have been forced to make do with less or rely upon other sources of retirement income to cover some of the expenses their Social Security checks used to pay for.
Some argue that this could be corrected if the Social Security Administration were to start basing COLAs on the Consumer Price Index for the Elderly (CPI-E) rather than the CPI-W. They say the CPI-E better reflects seniors' spending habits and would result in larger COLAs. A senior who filed for average Social Security benefits over 30 years ago would have received an additional $14,000 by now had the CPI-E been used to calculate COLAs rather than the CPI-W, according to the Senior Citizens League.
But unfortunately, this remains a matter of debate among politicians. There are those who want to increase Social Security benefits while others fear higher COLAs could exacerbate Social Security's solvency issues. For now, there's not much the average beneficiary can do other than wait and see what changes (if any) the government decides to make to the program in the future.
3. They could come back to bite you
Most people think of gaining money when they think of COLAs, but these increases could also raise taxes for some people. The federal government taxes the Social Security benefits of those whose provisional income -- adjusted gross income (AGI), nontaxable interest, and half their annual Social Security benefit -- exceeds $25,000 for an individual or $32,000 for a married couple. Some states tax Social Security benefits as well.
The thresholds for benefit taxation haven't changed in years. As the average benefit check continues to rise thanks to COLAs, more seniors find themselves facing these taxes. This could further reduce the value of your Social Security checks. It could also lead to serious headaches at tax time if you're not prepared.
This is another problem that the average American can't change, much as you might like to. All you can do is familiarize yourself with the rules around Social Security benefit taxation and set aside the government's cut in case you owe anything.
None of this is intended to be discouraging. COLAs do make life a little bit easier for many seniors. But being aware of their limitations and drawbacks can help you avoid unpleasant surprises in the future. Anticipating potential problems now gives you more time to prepare, so you're not left scrambling if your future COLAs don't help you as much as you'd hoped.
