Ida May Fuller got her first Social Security benefit payment in January of 1940 for $22.54. Ten years later, her monthly payment remained stagnant at the same number: $22.54.
In those days, the Social Security Administration (SSA) didn’t try to keep up with inflation–a hardship for most beneficiaries. But now, the SSA regularly increases your percentage of benefits to keep up with inflation.
For 2015, the SSA has announced a 1.7 percent increase in benefits. This is called Cost of Living Adjustments (COLA).
How does Cost of Living Adjustments Work?
COLA is set in place to make sure that your SS benefits still hold the same financial impact over time. Inflation (the increase of prices for goods or services over time) can cause the amount you can purchase with your dollar to decrease. The SSA makes sure to adjust the amount of money you receive in order to cover inflation.
How Is It Calculated?
It is calculated through the coordination of different government departments and numbers. The Bureau of Labor Statistics calculates the percentage increase in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). The CPI-W monitors monthly prices that are paid by consumers like you for goods or services. They look at the third-quarter of the last year CPI-W was calculated (the last year COLA was calculated was in 2013) and the third-quarter of the current year to see if there is an increase in prices. If there is at least a 0.1 percent increase, COLA will take effect.
What Does This Mean for You?
This means that the 64 million Americans who receive Social Security and Supplemental Security Income will see an increase in their monthly checks beginning in 2015.
Around 8 million individuals who receive SSI benefits will begin to see their increased payments on December 31, 2014.
Keep in mind that if you retire before the normal retirement age (67), your benefit will be lower than your primary insurance amount (PIA). The PIA is directly related to the benefits you receive. Your PIA is increased through the COLA.
Taxable Income Increases Too
Also taking effect in January 2015, the government will increase the Social Security Tax. It will increase from $117,000 to $118, 500.
How Long Has COLA Been Around?
In 1972, Congress initiated the COLA Act as a Social Security Amendment. Before the act was passed, it was Congress’s responsibility to determine if there needed to be an increase in benefits. In 1972, inflation was pretty high so COLA would be activated instantly if there were at least a 3 percent increase in the CPI-W.
When inflation began to go down, the 3 percent rule was abandoned because Congress realized there might not be a COLA otherwise, and so Congress had removed the rule by 1986.