The Social Security Administration recently announced a cost-of-living adjustment (COLA) for 2014. Social Security and Supplemental Security Income benefits for some 63 million Americans will increase by 1.5 percent.
The ceiling on earnings subject to Social Security taxes will also increase — from $113,700 to $117,000. This will affect approximately 10 million of the estimated 165 million Americans who will pay into the Social Security system in 2014.
COLA is designed to prevent inflation from eroding the purchasing power of benefits. It is based on the change in a price index known as the CPI-W from the third quarter of last year to the third quarter of the current year. If prices, as measured by the index, do not rise, no COLA is implemented.
Cost-of-living adjustments were enacted as part of the 1972 Social Security Amendments. Prior to that, benefits only increased when Congress passed legislation for that specific purpose.