Cost of Living Adjustments and Social Security Coverage
Social security disability claimants are often unfamiliar with the details of the benefits granted by the Social Security Administration (SSA) including the impact of the “fine print” on their benefits. In reality, the details — such as cost of living adjustments (COLA) — are critically important.
Inflation ProtectionCOLA adjustments are critical for protecting claimants from the ravages of inflation. When there is no inflation protection (in the form of COLA adjustment), what may initially seem to be an adequate benefits amount can quickly fall below the "acceptable" amount necessary to maintain one*s lifestyle.
For example, suppose that your Social Security benefit - based off the primary insurance amount (PIA) - is $2,000 per month. Though that may be sufficient to provide a reasonable lifestyle in 2018, in ten years, the impact of yearly inflation may raise your expenses above the original PIA value.
If the SSA did not adjust the PIA value in accordance with annual COLA increases, then you could be faced with substantial barriers years down the line. Fortunately, the SSA does adjust benefits in accordance with changes in cost of living.
How Cost of Living Adjustments Work in the Social Security Benefits ContextSince 1975, the SSA has implemented COLA increases that are pegged to the Consumer Price Index for goods and services. COLA increases are not fixed (as they are with many private disability insurance policies). Instead, the cost of living adjustment can vary quite significantly on an annual basis - for example, in 2018 the COLA was 2.8 percent, while in some years, the SSA has only increased benefits by 0.3 or 0.5 percent.
The Consumer Price Index measures the cost of consumable goods and services, such as housing, transportation, education, food and beverages, and various other expenses that burden American consumers. The SSA adjusts cost of living annually to ensure that the benefits paid out to claimants are up-to-date with the Consumer Price Index.
COLA is also used to increase the earned income exclusion that applies to disabled claimants who qualify for SSI benefits. For example, in 2019, the earned income exclusion applicable to students increased by 2.8 percent to $1,820 per month. This amount - the earned income exclusion - represents the "covered earnings" that are allowed to certain SSI recipients, so that they can receive both SSI benefits and a bit of extra income on the side.
Social Security COLA Gains Are CompoundingIt's worth noting that COLA increases are compounding, in that the gains are added to the baseline Social Security benefit (the "primary insurance amount"). As such, any future gains via COLA will affect the compounded PIA benefit amount - though it may seem like a minor adjustment, compounded gains can have a significant impact as the years pass. In a decade or more, the difference between simple gains and compounded gains can measure up to hundreds of dollars per month.