How Are Cost Of Living Increases Applied?

Dec 14 2016 - 8:15am

How do you apply the rise in Social Security to your current benefit amount. I would think that you take the benefit amount from this year, multiply it by the COLA (.3%) and that gives you your increase amount. But it doesn't work that way. The amount is always different. Are they rounding something? What has happened is that they round the COLA which is .34793 to .3 which lowers the amount by $.50 ($5.25 vs $4.75) . Then when they calculate the increase it is $.10 or $.65 less then calculate. So my benefit amount is $1.15 less then you might think. Now I know that $1.15 isn't a lot but neither is .3%. I do realize that they are rounding the .34793 but............ Can you explain?

Hi,

Cost of living adjustments (COLA) are based on changes in the consumer price index. The period considered can vary depending upon when the last Social Security COLA occurred. As you mention, the official COLA increase for 2017 is .3%, and that calculation is explained in the following reference: https://www.ssa.gov/oact/cola/latestCOLA.html.

The .3% increase is applied to a Social Security recipient's gross monthly benefit rate (i.e. amount before any withholdings or rounding). For example, say Joe's gross monthly benefit rate in 2016 is $1500.80. Joe would actually only be paid $1500 after rounding to the lower even dollar amount. However, the .3% COLA for 2017 would be applied to Joe's gross benefit of $1500.80 in order to arrive at his new gross benefit rate of $1505.30 (i.e. 1500.8 x 1.003). That amount would then be rounded down to $1505, which would become Joe's new monthly payment rate for 2017.

Things can be even more confusing when withholding for Medicare premiums or income taxes are involved, but the calculation explained in the above paragraph is always the first step in applying the COLA.

Best, Jerry