Social Security: A COLA that’s not a cola, but still refreshes
You are most likely to see the word “cola” in ads about those refreshing carbonated drinks that seem to go with every burger and fries. But a cola can also be something just as refreshing (and much more important) to the elderly and disabled, to widows, widowers and children who have lost a parent.
Millions of Americans who get Social Security or Supplemental Security Income benefit payments receive an annual cost-of-living adjustment (COLA).
It helps ensure that their benefit payments keep pace with inflation. Last month, Social Security announced that more than 51 million people will receive a 2.1 percent increase in their monthly benefit payments. The 2.1 percent COLA will show up in the January 2004 benefit payments for Social Security beneficiaries. And higher payments for Supplemental Security Income recipients will begin Dec. 31.
The COLAs are tied directly to the Bureau of Labor Statistics’ Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). The CPI measures inflation as experienced by consumers in their day-to-day living expenses. Annual increases are higher during periods of high inflation and lower during periods of low inflation
This is the 29th straight yearly rise in benefits since automatic cost-of-living adjustments began in 1975.
Many financial planners point out that the annual COLA is one of Social Security’s most important features. Fewer than 20 percent of private pensions have automatic cost-of-living increases, according to the Employee Benefit Research Institute.
Without a COLA, retirement benefit payments could lose their purchasing power over time. For example, if the annual inflation rate were 4 percent, an item that costs $25 today would cost $50 in 18 years. This COLA protection becomes even more important as workers live longer after retiring-the average life expectancy for a 65-year-old today is more than 17* years, compared with about 12* years when the Social Security program began in 1935.
Here is a brief primer on the history of Social Security’s COLA, and how it works.
Before 1975, it took an act of Congress to increase Social Security benefit payments. In fact, the first increase was not authorized until 1950, 15 years after the original Social Security Act was passed, and 10 years after the first monthly benefits were paid.
The automatic increases that began in 1975 were paid in July until 1983.
That year, as part of a package of reforms intended to strengthen Social Security’s long-range solvency, the annual cost-of-living adjustment was delayed for six months. So, the COLA increase originally scheduled for July 1983 was not paid until January 1984. The COLA has been paid in January of every year since.
The highest automatic increase was 14.3 percent in 1980; the lowest COLA was 1.3 percent in 1999.