Cost-of-Living Adjustment (COLA)

A cost-of-living adjustment (COLA) is a periodic increase to a pension, salary, or other type of payment to compensate for inflation. COLAs are designed to ensure that the purchasing power of a fixed income does not decline over time.

COLAs are typically based on the Consumer Price Index (CPI), which measures the average change in prices for a basket of goods and services. The CPI is calculated by the Bureau of Labor Statistics (BLS) and is released on a monthly basis.

The amount of the COLA is determined by the difference between the CPI for the current year and the CPI for the previous year. For example, if the CPI for 2023 is 2% higher than the CPI for 2022, then the COLA for 2023 would be 2%.

COLAs are important because they help to protect retirees and other fixed-income recipients from the effects of inflation. Without COLAs, the purchasing power of a fixed income would decline over time, making it more difficult for retirees to meet their living expenses.

There are a number of different types of COLAs. The most common type is a general COLA, which is applied to all recipients of a particular benefit. Another type of COLA is a targeted COLA, which is only applied to recipients who meet certain criteria, such as those who are living in poverty.

COLAs are typically paid on a monthly basis, but they can also be paid on a quarterly or annual basis. The frequency of the COLA payments depends on the type of benefit.

COLAs are an important part of the retirement income system. They help to ensure that retirees and other fixed-income recipients can maintain their standard of living in the face of inflation.