The United States Social Security Administration (SSA) has announced that the inflation index it employs to establish cost-of-living adjustments (COLA) has escalated during the past 12 months. Therefore, Social Security and SSI benefits will increase by 0.3 percent in 2017. But how is the Cost-of-Living Adjustment (COLA) established and how does it work?

How is the Cost-of-Living Adjustment (COLA) Established?

Social Security cost-of-living adjustments rely on the consumer price index (CPI) for Urban Wage Earners and Clerical Workers. The CPI is intended to trace retail values as they impact workers, and incorporates the prices of essential costs such as transportation, food, shelter, and health care.

Another way of explaining it is that Social Security cost-of-living adjustments are determined by inflation. If costs go up in a given year, Social Security benefits will be changed to preserve beneficiaries’ buying power at a consistent level.

Yearly increases are finalized by the change in the CPI-W within the time between the third quarters of the two calendar years prior to the year when the COLA will come into operation.

If CPI-W goes down, Social Security still cannot have a negative COLA. When deflationary periods occur, Social Security payments will not change.