We have a more detailed note about computation of COLAs here: https://meyersmoney.blog/2022/08/10/what-is-the-social-security-cola-cost-of-living-adjustment-and-how-is-it-computed/

However the example computation in that article was the 2022 COLA (computed in late 2021). This is just an update showing the computation for the 2023 COLA — which couldn’t be computed until several months after that previous note was written because it requires the September CPI-W data. So here’s an update:

How is SS Cola Computed?

Each year, in October, SS computes the COLA which will apply to increase benefits starting with the first payment to be received in the following January. The COLA becomes effective in December of the current year but because benefits are paid in arrears, the January payment is for those December benefits.

It’s computed by taking the average of the CPI-W from July, August and September (which is why they compute it in Oct, once the Sep numbers come out) — and subtract from that the average of the CPI-W from the previous[*] July, August, and September.

Example:

2021: 
July:  267.789
Aug: 268.387
Sep: 269.086
Average: 268.4206666667

2022:
July: 292.219
Aug: 291.629
Sep: 291.854
Average: 291.9006666667

Now find the percentage increase:

(291.901 – 268.421) / 268.421 == 0.0874…

That, then, gets rounded to the nearest 0.1% — so 8.7%

Social Security gets the CPI-W from the BLS.  And re-publishes the raw CPI-W data here:

https://www.ssa.gov/oact/STATS/cpiw.html

Here are the historical COLAs going back to 1975:

https://www.ssa.gov/oact/COLA/colaseries.html

Note that it IS possible for the COLA to be zero, but it cannot be negative. It was zero in 2009, 2010, and 2015.

Additional things worth noting:

Per Social Security:  The January 2023 COLA will also be applied to Supplemental Security Income (SSI) and railroad retirement “tier 1” benefits, among other changes in the Social Security program. Although COLAs under the federal Civil Service Retirement System (CSRS) and the federal military retirement program are not triggered directly by the Social Security COLA, these programs use the same measuring period and formula for computing their COLAs.

[*] The Fine Print:  While the computation usually compares the current year’s third quarter average CPI-W to the previous one, the actual rule is not to compare to the previous one, but to the highest previous one — which, if there is a decline in CPI-W along the way, could actually be a different, earlier year rather than just the immediately previous one.