What Is the Cost of Living Increase for 2023?

A Cost-of-Living Adjustment (COLA) represents an increase in benefits or pay designed to help maintain purchasing power amidst rising prices in the economy. This adjustment is particularly relevant for various government benefits, ensuring that their value does not diminish due to inflation. COLAs serve to counteract the erosion of financial stability for recipients, allowing them to better afford essential goods and services. These adjustments are a standard annual process.

The 2023 Cost-of-Living Adjustment

The Cost-of-Living Adjustment for 2023 was 8.7%. This percentage increase took effect with benefits payable in January 2023 for both Social Security and Supplemental Security Income (SSI) recipients.

If a benefit amount was $1,000, it would increase to $1,087. The 2023 COLA was one of the largest adjustments in recent decades, marking the highest increase since 1981. This increase reflected the higher inflationary environment during the preceding period.

How the COLA is Determined

The methodology for calculating the Cost-of-Living Adjustment is defined by law. The Social Security Administration (SSA) determines the COLA based on increases in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). The Bureau of Labor Statistics (BLS) is responsible for calculating and publishing the CPI-W on a monthly basis.

The CPI-W measures the average change in prices for a “basket” of consumer goods and services purchased by urban wage earners and clerical workers. To determine the COLA, the SSA compares the average CPI-W from the third quarter (July, August, and September) of the current year to the average for the third quarter of the last year in which a COLA became effective. If there is an increase in this comparison, that percentage, rounded to the nearest tenth of one percent, becomes the COLA for the following year. No COLA is applied if there is no increase in the CPI-W, or if the rounded increase is zero. The SSA announces the COLA each October, after the third-quarter CPI-W data becomes available.

Impact on Federal Benefits

The annual Cost-of-Living Adjustment directly impacts several federal benefit programs. Social Security benefits are the primary program affected, including retirement, disability insurance (SSDI), and survivor benefits. The COLA percentage is applied to an individual’s primary insurance amount (PIA), which is the base monthly benefit.

Supplemental Security Income (SSI) payments also receive the same COLA percentage adjustment as Social Security benefits. While Social Security COLA increases typically take effect with January payments, SSI beneficiaries often receive their adjusted payment slightly earlier, at the end of December of the prior year, especially if January 1 falls on a holiday.

Veterans’ benefits, such as disability compensation, pension benefits, and Dependency and Indemnity Compensation (DIC), are adjusted by the same COLA percentage. These increases take effect on January 1. Federal civilian and military pensions, including those under the Civil Service Retirement System (CSRS) and the Federal Employees’ Retirement System (FERS), also incorporate COLA adjustments. While CSRS COLAs typically match the full inflation rate, FERS COLAs may be capped, meaning they might not fully reflect the CPI-W increase, particularly if inflation exceeds certain thresholds.