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Key Points
Social Security COLAs are based on third-quarter inflation changes year over year.
July's data, once it becomes available, will help shape the upcoming COLA.
An official COLA won't be available until mid-October.
If you're a retiree on Social Security, you probably know how important the program's annual cost-of-living adjustments (COLAs) are. Without those raises, your benefits wouldn't have a way to keep up with inflation.
Earlier this year, Social Security benefits got a 2.8% COLA. If you thought that was stingy, you weren't alone. A good 54% of Social Security recipients said a 2.8% COLA wouldn't cut it earlier this year in a Motley Fool research survey.
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Because COLAs are so important to Social Security recipients, a lot of people are already looking out for clues on what to expect in the new year. You should know that July is an important month in that context.
That's because Social Security COLAs are based on third-quarter inflation data. But it will still be a while until we find out what next year's COLA looks like officially.
How Social Security COLAs are calculated
Social Security COLAs are calculated based on changes to the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) during the third quarter of the year. Readings from July, August, and September are compared to the previous year, and if there's a rise, Social Security benefits get a boost.
July's CPI-W reading is set to be released the morning of Aug. 12. So at that point, we should have a piece of the COLA puzzle -- but an incomplete picture.
Until September's CPI-W reading comes in, next year's COLA will remain a guess. That information won't be available until Oct. 14.
Hopefully, the Social Security Administration will be in a position to make an official COLA announcement that day. Last year, the COLA announcement got delayed as a result of the government shutdown, which delayed CPI-W data.
What next year's Social Security COLA will and won't do for you
Next year's Social Security COLA may help you keep up with rising costs. But one thing you shouldn't expect it to do is improve your financial situation dramatically.
If you've generally been struggling to pay your bills, even a generous raise from Social Security isn't likely to fix that situation. COLAs are tied to inflation, so if there's a big one, it will come at the expense of higher costs.
This doesn't mean you shouldn't look out for a COLA announcement as soon as it becomes available, so you can start budgeting for the new year. But it means you should also consider making changes to your financial situation if you're having a hard time.
That could mean downsizing to reduce your housing expenses. It could mean working part-time or joining the gig economy for added income. Or it could mean making a Medicare plan switch in the fall to lower your costs. No matter what option you decide on, it's better to take action than to assume your upcoming Social Security COLA will spell relief.
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