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Cost of Living Adjustment (COLA)
Definition
A cost of living adjustment is an increase in wages or benefits to offset the effects of inflation and maintain purchasing power.
Explanation
COLAs are commonly applied to Social Security benefits, pensions, and some employment contracts. The adjustment is typically based on the Consumer Price Index (CPI) and varies by year depending on inflation rates.
For employees, a COLA ensures that a raise at least maintains existing purchasing power. Without COLAs, workers effectively take pay cuts during periods of high inflation as their dollars buy less.
Example
Social Security beneficiaries received an 8.7% COLA in 2023, increasing the average monthly benefit by about $146 to offset high inflation.