Glossary

What is a cost of living adjustment (COLA)?

A cost of living adjustment (COLA) is an annual adjustment made to certain benefits or salaries to account for inflation and ensure that recipients maintain their purchasing power. In the United States, COLAs are most commonly associated with Social Security benefits and Supplemental Security Income (SSI). These adjustments are calculated based on the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) and reflect the changing cost of goods and services, such as housing, food, and healthcare.

Purpose of cost of living adjustments

The primary goal of a COLA is to protect beneficiaries, such as retirees or individuals on fixed incomes, from the negative effects of inflation. As prices increase, a fixed income loses its value, making it harder for individuals to afford basic expenses. COLAs ensure that benefits rise in step with inflation, providing financial stability and preserving quality of life for those who rely on these payments.

How do cost of living adjustments work in the US?

In the United States, the Social Security Administration (SSA) determines COLAs based on changes in the CPI-W, which measures the price fluctuations of a predefined basket of goods and services. Key categories in the CPI-W include:

• Food and beverages: Items like dairy, meat, and prepared meals
• Housing: Rent, utilities, and home furnishings
• Transportation: Gasoline, public transportation, and vehicle costs
• Healthcare: Medical services, prescription drugs, and supplies
• Recreation: Entertainment products, such as electronics and toys
• Education and communication: School tuition and telecommunications services

If the CPI-W increases, Social Security and SSI benefits are adjusted upward by the same percentage. If there is no increase in the CPI-W or the change is negligible, no COLA is applied for the following year.

Criticisms of COLA calculations

The use of the CPI-W for calculating Social Security COLAs has faced criticism for not accurately reflecting the spending patterns of seniors, who typically allocate a larger share of their income to housing and healthcare than the broader working population. Some suggest using a different index, such as the Consumer Price Index for the Elderly (CPI-E), to better align adjustments with retirees' actual expenses.

Eligibility for COLA benefits

COLA increases apply to individuals receiving Social Security benefits, including retirees, disabled individuals, and survivors, as well as those receiving SSI. In some cases, veterans and federal retirees may also qualify for COLA adjustments. Additionally, temporary COLA adjustments may be granted to government employees, such as members of the military, who work in areas with a high cost of living.

Cost of living adjustments globally

While COLAs are a staple of the US Social Security system, other countries address cost-of-living challenges differently. For instance, France has implemented energy price caps, and Germany has provided one-time payments to offset rising living costs. These strategies reflect alternative approaches to mitigating inflationary pressures and ensuring financial stability for citizens.