What is

Cost of Living Adjustment (COLA)


Cost of Living Adjustment is the amount of money a company spends to fill a vacancy, including finding, hiring, and onboarding a new employee. Learn more.

This a social security policy in the United States that adjusts how much recipients of monthly benefits like pensions receive per month. The adjustment is made following the consumer price index and reflects inflation. COLA is only applicable to the US but many other countries user a similar approach. 

Recently, inflation has reached new heights around the world. With costs of living increasing almost everywhere, policies like the Cost of Living Adjustment (COLA) become increasingly crucial.

This United States social security policy ensures that the benefits under social security schemes are adjusted according to inflation.

Understanding COLA

The US government designed COLA to help those who depend on social security benefits. 

COLA uses the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) to account for how much market prices for basic goods fluctuate in a year. The index checks how much the prices of goods and services have changed over a period of time. This helps them understand the current inflation rate. 

Using this information, COLA helps make adjustments to federal benefits, including: 

  • Social security benefits
  • Veteran benefits 
  • Federal retirement plans 
  • Supplemental Security Income payments 

The Importance of COLA

COLA was first introduced in 1972 due to surging inflation in previous years. Prior to COLA, benefits remained stagnant for many years, so beneficiaries found their incomes steadily declining.

COLA is crucial for people who rely on benefits, for example, retirees and people with disabilities who are unable to work. As inflation raises prices, without COLA, these people may find it difficult to pay for basic expenses. With already reduced purchasing power, COLA is an important layer of protection for these individuals. 

Calculating COLA

In October every year, the US Social Security Administration announces the COLA for the upcoming year. The increased amount takes effect in January, about three months later. 

To calculate COLA, the government looks at the year-on-year increase in the CPI-W. It uses the third quarter of the year as the reference point. However, if there is no increase at all, then there is no COLA adjustment either. 

Similar Programs to COLA in Other Countries 

Many other countries around the world have policies similar to COLA. While the specific mechanisms and names of these policies may differ, the underlying principle is to ensure that recipients of government benefits can maintain their purchasing power over time. 

Canada Pension Plan (CPP) Indexation

has a policy known as the Canada Pension Plan (CPP) Indexation. CPP Indexation helps the government adjust pension benefits annually to account for changes in the Consumer Price Index. The adjustment helps ensure that retirees and beneficiaries receive an increase in their pension payments to keep up with the cost of living.

United Kingdom Triple Lock

In the United Kingdom, a policy called the Triple Lock helps adjust pensions and some other benefits. The Triple Lock system considers the highest of three figures when calculating adjustments: the increase in average earnings, the rate of inflation (measured by the Consumer Prices Index), or 2.5%. 

This approach is intended to provide a safeguard against fluctuations in inflation and ensure that pensioners' incomes do not fall behind.

Australia Age Pension Indexation
implements a similar policy called the Age Pension Indexation. It involves adjusting the Age Pension payments twice a year, in March and September. The indexation takes into account the higher of two factors: changes in the Consumer Price Index or average weekly earnings. 

Germany Pension Adjustment

employs a system known as Rentenanpassung (Pension Adjustment). It helps adjust pensions in line with the development of wages. Pensions typically increase annually to reflect changes in the general wage level. This protects pensioners from the erosion of purchasing power due to inflation.

Japan Public Assistance

In Japan, there is a policy called Public Assistance, which includes the Standard Monthly Benefit Amount (SMBA). The SMBA sees regular adjustments to maintain its real value and help recipients cope with changes in the cost of living.

Sweden Pensions-SGI

uses an indexation policy known as Pensions-SGI (Income Indexation of Pensions), which links pensions to changes in average earnings. This ensures that pensioners' incomes keep pace with the general standard of living and economic developments.

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