Each year, the Social Security Administration computes a Cost of Living Adjustment (COLA) for the payments it makes to beneficiaries which attempts to ensure that spending power of beneficiaries is preserved. The annual COLA has been mandated by federal law since 1975. Prior to 1975, social security payments were adjusted by legislation.

The first automatic COLA, for June 1975, was based on the increase in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) from the second quarter of 1974 to the first quarter of 1975. The 1976-83 COLAs were based on increases in the CPI-W from the first quarter of the prior year to the corresponding quarter of the current year in which the COLA became effective. After 1983, COLAs have been based on increases in the CPI-W from the third quarter of the prior year to the corresponding quarter of the current year in which the COLA became effective.

The COLA for 2008 is set at 5.8%, the largest increase since 1982, primarily due to significant inflation in fuel and food prices during 2008. You can see the computation of the COLA for 2008 at the Social Security Administraton.

Interestingly enough, the current legislation enacted in 1983 does provide for suspension of Cost of Living Adjustments, if the combined assets of the Social Security trust funds are below 20 percent of annual expenditures. (This limitation only applies to Social Security; SSI would be unaffected.) Such limitation has not occurred in the past, nor does it affect the current COLA determination. The combined trust fund assets at the beginning of 2008 are estimated to be 359.0 percent of 2008 expenditures.

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