You may have stopped working, but the cost of living has not stopped rising. In the 1970s, inflation was so high that Congress ratified a provision to make periodic cost-of-living adjustments (COLAs) to the amounts distributed among pension benefits and government entitlements. Prior to 1975, an increase in Social Security benefits required special legislation to make a cost-of-living adjustment. These COLAs are used to counteract the effects of inflation, and generally equal to the percentage increase in the consumer price index for urban wage earners and clerical workers (CPI-W), a variant of the consumer price index calculated by the Bureau of Labor Statistics. The COLA formula is currently determined by applying the percentage increase from the third quarter of one year to the third quarter of the following year. If consumer prices drop, or inflation is not high enough to substantiate an adjustment, there is no COLA increase the following year.
While Social Security Administration does not increase their payments every year, benefits in 2018 will increase 2.0 percent for recipients of Social Security and Supplemental Security Income. Private insurance plans may likewise see an increase in payment amounts. Currently, the average Social Security recipient receives $1,377 a month, or $16,524 a year. Average payments will increase by $27.38 a month, or $329 a year in 2018. This is the largest increase since a 3.6 percent hike in 2012.
Because COLAs for retirees do not reflect increases in the productivity of people who are in the work force, COLAs do not necessarily make retirees better off financially. Although the 2018 COLA may provide recipients with some financial relief, this increase may not be enough to offset the rising costs of prescription drugs, utility and housing costs, and Medicare premiums. Notwithstanding, we welcome any COLA increase for 2018!
Patrick Purcell, Federal Employees: Pay and Pension Increases Since 1969, Cornell L. Rev. (2010).