For those living on a fixed income, keeping up with the rising cost of living is a constant concern. The federal government gives SSDI recipients a hedge against inflation through Cost of Living Adjustments, or COLA for short.
If you’re new to receiving SSDI benefits, here’s what you need to know about COLA so you can better plan your finances.
What Are Cost of Living Adjustments?
Cost of Living Adjustments are how the Social Security Administration (SSA) protects disability benefit recipients from inflation. Each year, the SSA evaluates whether economic conditions warrant an increase in benefit payments. 42 U.S.C. § 415(i) is the federal statute that governs the process and prevents arbitrary increases.
COLA happens frequently, but it is never guaranteed. In periods where the cost of living shows no increase or goes down, the SSA doesn’t make an adjustment to benefits. Federal law also blocks COLA if the year prior had a general benefit increase.
How COLA Affects SSDI Benefits
If there will be a COLA for a benefit year, the SSA typically makes an announcement in October, and you’ll receive an official notification in December by mail or electronically. The adjustment applies uniformly to all SSDI recipients and takes effect the following January. You don’t have to do anything as part of the process.
The calculation for a COLA is straightforward: the percentage listed in the notice is added to your existing monthly benefit amount. For example, if you currently receive $1,200 per month and there is a 3% COLA increase, your new benefit amount will be $1,236 for the following year.
Factors That Influence COLA Calculations
The main factor the SSA uses to calculate COLA is the Consumer Price Index for Urban Wage Earners and Clerical Workers, or CPI-W. This figure measures price changes across a few key categories, including the following:
- Rent, utilities, home maintenance, and other housing expenses
- Car payments, gas, and transit fares
- Groceries
- Healthcare costs
- Clothing expenses
The SSA focuses on data from the third quarter of the year, so economic changes in the fourth quarter don’t immediately impact your benefit payments. This approach gives some stability to the process, but can cause lag if the economy suddenly changes.
Periods with higher inflation, such as energy or supply chain crises, tend to see larger COLA increases. If the economy was stable or deflationary, there may be a minor adjustment or no COLA at all.
Tax Ramifications of COLA for New York SSDI Recipients
In New York, SSDI payments are entirely exempt from state income tax. No matter how large a COLA increase is, you will not owe state taxes on your benefits.
However, you may still be liable to pay federal taxes in some situations. The IRS uses your combined income to determine the taxability of your benefits. This is the sum of your adjusted gross income (AGI), nontaxable interest, and half of what you receive from Social Security.
If you’re single, you may owe federal income tax if your combined income exceeds $25,000. If you’re married filing jointly, you may be taxed above $32,000. Up to 85% of your benefit amount may be taxable, depending on your specific income bracket.
Contact a Southwest New York SSDI Attorney
If you have questions on your COLA notification, the southwest New York attorneys of Fessenden Laumer & DeAngelo, PLLC can help. Over the last three decades, we’ve helped thousands of clients through Social Security Disability applications and appeals. We take a collaborative approach based on each of our team members’ unique backgrounds, and strive to give you the personalized and dignified representation you deserve through a difficult personal and financial situation. Contact our office to schedule a consultation.
