What is the cost-of-living adjustment (COLA) in Social Security?

The cost-of-living adjustment (COLA) in Social Security is fundamentally aimed at helping beneficiaries maintain their purchasing power in the face of inflation. Each year, the Social Security Administration calculates the COLA based on changes in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). This measurement reflects the cost changes of a typical basket of goods and services consumed by these groups.

When prices increase due to inflation, the COLA ensures that benefits are adjusted upward, thereby preventing a loss of real value over time. This mechanism is particularly important for seniors and other beneficiaries who may rely on Social Security as a primary source of income, especially since many of their expenses, such as healthcare and housing, may rise consistently with inflation.

In contrast, the other options do not accurately represent the nature of COLA. One-time payment adjustments or increases based on wage growth do not provide ongoing adjustments aligned with the cost of living. Similarly, a reduction in benefits during economic downturns is contrary to the purpose of COLA, which is to safeguard against inflation rather than respond to economic fluctuations.