colas

COLAs, or cost-of-living adjustments, are automatic increases applied to fixed payments, such as pensions, government benefits, or salaries, to keep pace with inflation. They are designed to maintain purchasing power for beneficiaries and retirees without requiring annual legislative changes to each benefit or wage program.

Most COLAs are linked to a price index that measures changes in the cost of goods and services. In the United States, the most common measure is the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). If the index shows inflation, eligible payments are increased by a set percentage for the upcoming period. The specific index and method can vary by country and program.

COLAs are widely used for Social Security, federal and some state pensions, veterans’ benefits, and military retirement pay. They can also appear in private-sector pension plans or wage agreements through collective bargaining. Not all wages or benefits receive automatic COLAs; some programs require action by legislatures, employers, or administrators, and some may have caps or floors.

Critics note that COLAs may lag actual inflation or fail to reflect changes in housing, healthcare, or out-of-pocket costs. In some periods, automatic increases may be small or nonexistent if inflation is low. The use of CPI-based indices can also produce different results for savers with different spending patterns. The United States implemented the first automatic COLA for Social Security in 1975.