By: Sahil Luthra
To counteract the effects of inflation in the economy, an increase is made to Social Security and Supplemental Security Income (SSI). This increment is known as cost-of-living adjustment (COLA).
COLAs are typically equal to the percentage increase in the CPI-W for a specific period. The Consumer Price Index (CPI) represents the average prices of a collection of goods and is used to measure inflation
The COLA for 2022 is 5.9%, which means if someone received $10,000 in Social Security benefits in 2021, their 2022 annual benefit would total $10,590.
During the 1970s, the inflation was high, therefore compensation-related contracts, real estate contracts, and government benefits used COLAs to protect against that high inflation.
Since 1983, COLA depends up on the CPI-W from the third quarter of the previous year to the third quarter of the current year.
Before 1975, the Congress used to approve any increase in Social Security benefits through special legislation. In 1975, Congress agreed for a COLA provision to offer automatic yearly COLAs based on the annual increase in the CPI-W.
The COLA formula is calculated by applying the percentage increase in the CPI-W from the third quarter of one year to the third quarter of the following year.
COLA is reliant on two components: the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) and the employer-contracted COLA percentage.
In case of no COLA increase, Medicare Part B premiums remain the same for beneficiaries who get the premiums deducted from their Social Security checks.
If inflation is low, the recipients do not receive a COLA. If there is no CPI-W increase, then there is no COLA increase.
Some employers occasionally give a temporary COLA to employees who are required to perform work assignments in cities with a higher cost of living than their home city.
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