IMHO: Cost of Living 'Adjustment'

A couple of weeks back, the Social Security Administration announced that, for the second year in a row—but only for the second time since 1975—there would be no cost of living adjustment (COLA) for Social Security recipients. 


Of course, this close to an election, it should come as no surprise that some went scurrying to introduce legislation that would provide some kind of supplemental funding to the nation’s seniors; similar actions were undertaken a year ago, ostensibly in the interests of economic stimulus, as well as the importance of supporting those on fixed incomes.  But this election year is one unlike most, perhaps any, in our memory—and concerns about the federal budget deficit have, thus far, overcome the political class’s natural inclinations in such matters.  

Whether or not you are on a fixed income, it’s hard to credibly argue that prices aren’t rising on everything from food to gasoline to utilities; from real estate taxes (those reassessments never come as rapidly when prices decline, do they?) to the monthly cable bill.  That said, there is a formula on which things are based, one that has, perhaps more often than not, worked to the benefit of those drawing Social Security benefits.  It is a formula that, in 2009, provided those beneficiaries with a 5.8% increase in benefits, the largest in a quarter century.  That’s right—did YOU get a 5.8% increase in 2009?    

Now, some of this is the timing in the formula, which considers the period from September of one year to the next.  For example, in the year that provided a 5.8% increase, if the formula had been applied from December to December (rather than September to September), the COLA would have been 0.8%, not 5.8%.  Some of it is because the COLA is calculated on an index that considers the purchases that current workers make, rather than retirees1.  And yes, some of it is because the Social Security benefit is never adjusted downwards—even when there is a decline in the cost index it tracks2.  In fact, the real reason that Social Security recipients/beneficiaries 3 aren’t getting a cost of living adjustment next year is not because prices haven’t gone up, but rather because prices haven’t yet risen above the level of September 2008 (remember $4/gallon gasoline?).  

However, for retirees accustomed to an annual, upward adjustment in their benefits, the lack of an increase surely came as something of a shock4, particularly after politicians found a way to smooth it over the previous year (and may yet again).  

The good news for Social Security beneficiaries is that, at least under current law, their annual benefits do not decrease and retain the potential to increase based on adjustments, however imperfect, in a designated cost of living index5.  Certainly, in a time when many have been asked to absorb a cut in pay or lost their jobs completely, with a family to support, there are worse things than living on a “fixed” income. 

Still, it should serve as a reminder to us all that planning for retirement should look beyond the income we happen to be drawing when we leave the workforce.  After all, if the income we have at retirement isn’t enough to adjust to the costs of living in retirement – It might well cost us an adjustment in how, or how well, we live through retirement. 


1 There were no automatic COLAs in Social Security until 1975 (see    

2 Consider that, if costs were adjusted for downward as well as upward moves, last year benefits would have been cut by 2.7%.   

3 Disabled workers and their dependents account for 19% of total benefits paid, according to the Social Security Administration (see 

4 I never cease to be amazed at what a high percentage of retirement income Social Security provides—not because it was designed that way, mind you, but rather because it remains relatively constant in an otherwise variable pooling of retirement income sources.  The Social Security Administration notes that Social Security provided at least 50% of total income for just over half (52%) of aged beneficiary couples and 73% of aged non-married beneficiaries.  Moreover, it was 90% or more of income for more than one in five aged beneficiary couples and 43% of aged non-married beneficiaries, though “total income” in this calculation excludes withdrawals from savings and non-annuitized IRAs or 401(k) plans.  Overall, the Social Security Administration says that Social Security benefits represent about 40% of the income of the elderly.  

5 More information about the COLA is at  An interesting 2009 webcast on the subject titled “What Happened to My Social Security COLA?” is viewable at, and a transcript is available at   For more information on some of the alternative COLA indexes, the AARP Public Policy Institute has published a fact sheet on the consumer price index and how it impacts Social Security Benefits at