What is a cost-of-living adjustment (COLA)?
November 1, 2022 3 min read
As prices rise, it can become tricky to cover expenses if your paycheck stays the same. That’s when cost-of-living adjustments can help.
A cost-of-living adjustment (COLA) is an increase in pay or benefits designed to keep up with the rising costs of goods and services due to inflation. COLAs help keep people’s earnings and living costs in proportion.
- Inflation is one factor that makes goods and services cost more.
- COLAs are designed to help people’s incomes keep up with price increases.
- Since 1975, the Social Security Administration has made COLAs every year based on the Consumer Price Index.
- Businesses might offer COLAs or other raises to their employees, but it’s not required.
Social Security COLAs
COLAs began as a way to align Social Security and Supplemental Social Security Income (SSI) benefits with inflation rates. While inflation can impact the general public, it can be even more difficult for a person living on a fixed income such as Social Security, other fixed retirement benefits or disability payments to make ends meet.
Legislation for automatic, annual COLAs was implemented in 1975. Because of COLA legislation, Social Security benefits can maintain value for retirees in spite of a changing economy.
COLAs are automatic for Social Security and SSI and for some federal and state employee wages.
Do private companies offer COLAs?
Private businesses and organizations might also offer COLAs to their employees. Every company is different. It might be worth asking your employer how it handles cost-of-living raises, especially if you’re negotiating your salary.
How are COLAs calculated?
The Social Security Act created a formula to determine COLAs based on changes in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). The CPI-W is calculated monthly by the Bureau of Labor Statistics.
According to the Social Security Administration, the COLA is 5.9% for 2022 and will increase to 8.7% in 2023. It’s possible for Social Security and SSI beneficiaries to receive COLA notices online in their Social Security accounts.
How to manage high costs of living
COLAs aren’t the only way to handle money management. So how can you manage your finances—especially if you don’t get an income adjustment?
One place to start is by evaluating your budget. The Consumer Financial Protection Bureau (CFPB) recommends considering a couple of things:
- Income: Where does your income come from? Do you have one full-time position or are you a freelancer? Do you receive retirement benefits? Write down all your sources of income.
- Spending: Next, try listing all of your expenses, bills and due dates. Also keep track of smaller costs like dining out, coffee runs and personal care. A realistic look at your spending can help you determine where you might need to cut back.
Finding ways to save money can also help when your wallet feels light. Some living expenses, like health care, gas, groceries, housing and utilities, are necessary. But you may be able to cut back on other expenses.
You can also be purposeful about savings by doing things like:
- Opening a savings account and setting up an automatic account transfer. Even small amounts can grow over time.
- Cooking affordable meals at home.
- Taking advantage of sales, coupons and promotions.
- Building a retirement savings plan.
- Setting up an emergency fund for when you might need a financial buffer.
COLAs in a nutshell
As inflation increases, it can become difficult to keep up with rising costs. Social Security COLAs are generally calculated based on the Consumer Price Index and help balance out the increase in those costs for retirees and some types of employees.
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