What does "cost-of-living adjustment" (COLA) signify in Social Security?

The term "cost-of-living adjustment" (COLA) in the context of Social Security refers specifically to the automatic increase in benefits that helps ensure they keep pace with inflation. This adjustment is designed to counter the effects of inflation on the purchasing power of Social Security benefits, which can erode over time due to rising prices for goods and services.

The COLA is typically calculated based on changes in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W), reflecting the cost of living for the average American. As a result, beneficiaries can receive slight increases in their monthly payments each year to help maintain their financial stability in the face of rising costs.

Other options, such as an increase in retirement age or a decrease in benefits, do not accurately represent the purpose of COLA, which is focused on preserving value rather than adjusting eligibility or reducing support. Additionally, a one-time bonus for retirees does not align with the ongoing nature and intended purpose of the COLA mechanism. The correct choice emphasizes the importance of adjustments being made on a systematic basis to keep Social Security benefits relevant and effective for beneficiaries.