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So, What is a COLA?

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  |  Updated on 
  |  Updated on 
October 8, 2026

Social Security

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The Summary

It’s October, which means one acronym is making its annual appearance in the news: COLA. In this case, it’s the COLA for Social Security.

If you’re wondering what a COLA is — and no, we’re not talking about soda — you’re in the right place. COLA stands for cost-of-living adjustment, and they are used by both the private sector and the government. In the private sector, COLAs are generally annual increases in compensation, and for government programs, they are adjustments to the benefits they provide. 

The Social Security COLA plays an important role in determining how much beneficiaries receive each year. 

But where does the adjustment come from? Why does the government make it every year? And how does it affect Social Security benefits and the program’s long-term finances?

Keep reading for everything you need to know about these adjustments, from how they’re calculated to what they mean for millions of Americans who rely on Social Security.

What is the COLA?

For someone receiving the same government benefits year after year, inflation can gradually make it harder to cover everyday expenses. That’s where the COLA comes in. These adjustments happen annually and increase benefit payments to help offset rising prices across the economy. 

The federal government uses COLAs across many government programs, but the most notable one is Social Security, since 75 million retirees, survivors, and people with disabilities rely on it. 

Early in the program’s history, Social Security benefit increases occurred sporadically, with each requiring separate legislation from Congress rather than receiving an automatic annual adjustment. Congress established automatic annual cost-of-living adjustments in 1972, and the first took effect in 1975.

How is the COLA calculated?

Not all government programs use the same metric to measure inflation. The most commonly used and widely cited measure of inflation is the Consumer Price Index for All Urban Consumers (CPI-U), showing shifts in prices paid by the vast majority of the U.S. population (around 90%). It is used to adjust federal income tax brackets, standard deductions, and various other economic thresholds. 

Social Security is relatively unique in that the COLA is currently based on the Consumer Price Index for Urban Wage Earners and Clerical Workers, or CPI-W, which reflects price changes for a much smaller part of the U.S. population (around 30%). Published by the Bureau of Labor Statistics (BLS), it tracks average price changes for expenses such as food, housing, and transportation. 

The BLS performs a complex calculation that combines these changes into a single metric that averages these price increases or decreases. That metric helps everyone understand how much more or less expensive things are compared to the previous month or year. 

The Social Security Administration compares the average for July, August, and September with the same period in the last year a COLA took effect, usually the previous year. The percentage increase determines the adjustment. For example, a 2.8% increase in CPI-W would result in a 2.8% adjustment to benefits. If there is no increase, benefits stay the same.

How does the COLA affect Social Security?

Over time, COLAs help prevent inflation from steadily eroding the value of benefits. Let’s take a look at the case of Ida May Fuller, the first person to receive monthly Social Security benefits. Her first check in January 1940 was for $22.54. If Social Security payments had never been adjusted, the original benefit would barely cover a takeout order today. Keeping benefits in line with rising prices is especially important for people who rely on Social Security to cover most of their everyday expenses. 

However, higher monthly payments also mean higher program spending. Social Security is funded primarily through payroll taxes paid by workers and their employers. The program faces a growing gap between projected revenue, or the money the program takes in every year, and benefit costs. As the population ages, fewer workers support each beneficiary, putting pressure on the program’s ability to cover its costs.

What this means for you.

A COLA increase means a larger Social Security check, helping retirees keep up with rising prices. But a larger adjustment also means that the prices of key expenses have gone up. That extra money may help cover more expensive groceries and housing, but it won’t necessarily allow you to buy more.

Those larger checks also increase Social Security’s costs. Remember how we mentioned that other federal programs use other measures of inflation to calculate COLAs? Well, one option for reducing the program’s funding gap is to transition to a different metric that tends to reflect lower price increases, thereby producing smaller annual benefit adjustments. That would slow spending growth, but your benefits would also grow more slowly, leaving you with less money over time than under the current formula. 

If Congress does not address the program’s funding shortfall, Social Security will no longer have enough money to pay full scheduled benefits as soon as 2032, resulting in 22% across-the-board benefit cuts for millions of Americans who rely on those payments. 

To learn more about the program, the challenges facing it, and potential solutions, head to our Social Security primer. 

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What’s a COLA, and how does it impact Social Security benefits?

A bill passed by Congress to fund all or parts of the federal government for a limited time. It can keep the government operating if it fails to pass regular, full-year funding bills by the October 1st deadline.
Continuing Resolution (CR)
The point at which Social Security retirement benefits will only be funded by payroll taxes because the Old-Age Survivors Insurance (OASI) Trust Fund has run out. This trust fund closes the gap between revenue from payroll taxes and the total funding needed for monthly benefits. When we hit this point, an automatic 22% cut to benefits will be triggered. Up-to-date projections estimate this will occur in 2032.
Social Security Insolvency
The federal budget is the itemized plan for public expenditures of the federal government. This includes mandatory and discretionary spending. The budget is compiled annually and is named after the proceeding fiscal year, which runs from Oct. 1 to Sept. 30. If a budget is not agreed upon by the start of the fiscal year, a government shutdown will be triggered unless Congress passes a continuing resoultion, which provides funding at existing levels for a period of time to allow for negotiations to continue.
Federal Budget
This ratio compares the federal government debt of a country to the country's gross domestic product (GDP), in other words, what it owes to what it produces. Expressed as a percentage, the higher the debt-to-GDP ratio of a country the more likely it is that a country will face economic challenges due to its debt.
Debt-to-GDP Ratio
The federal debt is the cumulative amount the federal government owes to bondholders, both foreign and domestic. This represents the total, historical difference between federal spending and revenue.
National Debt
The federal budget deficit is the annual difference between the federal government’s revenue and how much it spends.
Budget Deficit
GDP is the total monetary value of consumer goods and services within a country's economy. This calculation considers consumer spending, government spending, private domestic investment, and a country's imports and exports.
Gross Domestic Product (GDP)
The U.S. federal government's sole source of income is tax revenue, which is primarily composed of individual income taxes, corporate income taxes, and payroll taxes. Other sources of tax revenue include excise taxes and estate taxes.
Tax Revenue
These bills provide and place limits on an agency's budget authority, the ability to spend government funds. There are 12 annual appropriations bills and occasional supplementary appropriations bills that obligate federal funds for specific purposes.
Appropriations Bills
Authorizing legislation is a prerequisite for Congress to appropriate budget authority, or the ability to spend government funds for various programs. Authorization laws also act as guidance on the appropriate level of funding to be set aside for specific programs. This might be in setting a limit, or it may simply authorize “such sums as may be necessary.”
Budget Authorizations
A congressional budget resolution establishes topline spending and deficit limits for the following fiscal year. Although not law, because it's not signed by the president, budget resolutions are enforceale using the rules of either chamber. By law, a budget resolution is to pass the House and Senate by April 15 of each year, which rarely happens.
Budget Resolution
The president's budget request kicks off the annual budget process and provides a breakdown of how the president would like Congress to enact tax and spending laws. This request is due on the first Monday in Feburary but is normally provided late.
Budget Request
Discretionary spending is the portion of the federal budget that Congress debates every year. There are 12 components of discretionary spending, and these are usually broken down into defense and non-defense spending.
Discretionary Spending
The programs that Congress is required to fund make up mandatory spending. This includes programs like Social Security, Medicare, and interest payments on the debt.
Mandatory Spending
What you pay for your own medical care.
Out-of-pocket Payments
Within the context of the Hospital Insurance (HI) Trust Fund, insolvency means that Medicare is unable to cover the full cost of Part A (hospital care) benefits.
HI Trust Fund Involvency
Chronic conditions are diseases and conditions that usually last for 3 months or longer, such as diabetes, heart disease, hypertension, and cancer.
Chronic Diseases
The percentage of the costs of a healthcare service that you pay (e.g., 20%). Coinsurance kicks in after you've paid your deductible.
Coinsurance
The amount you pay for healthcare services before your insurance begins to cover expenses.
Deductibles
Examples include disabilities that qualify the individual for Social Security Disability Insurance (SSDI) benefits (i.e., unable to engage in “substantial gainful activity” because of a medically-determined physical or mental impairment expected to last at least 12 months or until death), end-stage renal disease (ESRD), and amyotrophic lateral sclerosis (ALS).
Long-term Disabilities
For every current recipient of Social Security, there are several active workers whose taxes are transferred directly to retirees. When Social Security began, there were dozens of workers per every recipient. That number has shrunk to just under three workers for every active Social Security recipient.
Worker-to-Beneficiary Ratio
As a covered worker, you pay Social Security taxes up to the taxable maximum. In 2025, that amount is $176,100. Since Social Security was never meant to function as a retirement program, wages subject to taxation were capped so that high-income individuals did not end up with Social Security payments many times what would be necessary to prevent poverty in old age.
Taxable Maximum
As the spouse of a Social Security recipient, you are entitled to additional benefits of up to one-half of their full benefits. You do not have to have a work history to receive this payment. If you have worked and are owed Social Security benefits, you get the maximum of what you are owed or your calculated spousal benefit.
Spousal Benefit
All funds in the OASDI trust funds are invested in "special issue securities" specifically created for Social Security. In effect, they are IOUs that the government pays to itself.
Special Issue Securities
In the context of Social Security, the "replacement rate" or "replacement ratio" is the percent of pre-retirement earnings that Social Security recipients can expect to receive. Median-income retirees typically expect around a mid-thirty percent replacement rate, low-income retirees get closer to fifty percent, and high-income retirees typically receive a mid-twenty percent replacement rate.
Replacement Rate
Every covered worker pays a payroll tax that includes a combined 12.4% up to the taxable maximum.
Payroll Tax
The primary insurance amount is the sum of three separate percentages of the AIME. It is the initial benefit a retiree receives, and it increases with any future COLA.
PIA
The Old Age and Survivors Insurance Trust Fund is what most people picture when they hear "Social Security." This trust fund pays benefits to retired workers and their spouses and dependents. It also pays benefits to the survivors of deceased retirees.
OASI
OASDI stands for Old Age, Survivors, and Disability Insurance. It encompasses both the retirement portion of Social Security (OASI) and the disability insurance program (DI).
OASDI
The full retirement age began at 65 but is slowly increasing to the final age of 67 for those born in 1960 or later.
Full Retirement Age
Employers whose workers pay into Social Security also contribute 6.2% of each worker's payroll taxes. While it may seem like employers pay for half of all benefits, economists typically assume that any taxes paid by employers are in effect paid by employees, since in absence of the mandatory taxes, the employees would have higher wages by roughly the same amount.
Employer Contribution
Every covered worker contributes 6.2% of their paycheck in OASDI payroll taxes, which constitutes the "employee contribution" toward Social Security.
Employee Contribution
Future Social Security recipients can elect to retire early at 62 and receive reduced benefit payments. For more, click here.
Early Retirement Age
DI stands for Disability Insurance. While most people associate Social Security with retirement, it also technically encompasses disability insurance payments to almost nine million Americans.
DI
The total amount of any employee's pay that is taxed by Social Security payroll taxes. All wages below the taxable maximum are covered earnings. About 94% of workers fall under the taxable maximum every year.
Covered Earnings
The cost of living adjustment (COLA) is an annual adjustment for Social Security benefits designed to prevent losses in beneficiaries' purchasing power due to inflation.
COLA
Social Security recipients are not limited to retirees. In the OASI system, spouses are entitled to a spousal benefit, as are dependents of beneficiaries who are under the age of 19.
Beneficiary
Stands for average indexed monthly earnings. When a worker retires, the Social Security Administration summarizes up to 35 years of the worker's lifetime earnings and adjusts them for wage inflation. This number is then used to calculate the retiree's "PIA" or primary insurance amount.
AIME