How is the annual cost-of-living adjustment (COLA) determined?

The annual cost-of-living adjustment (COLA) is determined based on changes in the Consumer Price Index (CPI). The CPI measures the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services. This index reflects inflation and changes in the cost of living, making it an appropriate benchmark for adjusting Social Security benefits.

By linking COLA to the CPI, the Social Security Administration ensures that benefits keep pace with inflation, helping to maintain the purchasing power of beneficiaries. As prices increase due to inflation, the adjustment based on the CPI helps ensure that social security payments reflect these economic realities, thereby protecting beneficiaries from loss of income in real terms.

This method prioritizes the economic conditions affecting everyday consumers, which is critical given that Social Security benefits are often a primary source of income for retirees and those with disabilities. Other choices do not accurately reflect how COLA adjustments are determined, as they either focus on market fluctuations, overall economic growth without direct relation to living costs, or budgetary considerations that do not align with the specifics of COLA calculations.