Every year, the Social Security Administration will issue a cost-of-living adjustment to benefits paid under the system. You should note COLA only applies to Social Security and Supplemental Security Income benefits.
The SSA announced for 2022, the COLA will be 5.9%, which is one of the largest increases in decades. The increased amount is due to the current inflation rate.
How COLA works
The SSA explains COLA helps to ensure benefits keep pace with inflation. It helps ensure the spending power of the benefits remains steady.
The amount of COLA comes from the Consumer Price Index for Urban Wage Earners and Clerical Workers. The SSA uses the figure for the third quarter of the year. Officials will compare the figure to the figure from the previous year to get the percentage of increase. If there is no increase, then you will not receive a COLA. The SSA will never reduce benefits if the figure decreases from the previous year. It simply defaults to no increase.
The COLA will also impact other aspects of Social Security benefits. When it increases, it allows the income thresholds to increase as well. For example, if you receive SSI and the income threshold for you is $100,000 but there is a COLA for the next year, then the $100,000 will increase.
This happens because inflation reduces the buying power of the dollar. For example, if you can buy two candy bars with $1 in 2020, but inflation occurs, then in 2021, you may only be able to buy 1 1/2 candy bars with your $1.
By administering a COLA, the SSA is able to ensure you receive a number of benefits compared to what you always receive with the same buying power. As prices for everything increase, you can expect to see a COLA come January of the new year.