What Is A Cost-of-Living- Adjustment (COLA)?| Payroll

Cost-of-Living-Adjustment (COLA)

A Cost- of- Living Adjustment (COLA) is an increase in income to keep up with rising prices in an economy, commonly calculated based on the Consumer Price Index (CPI). This adjustment helps maintain purchasing power for individuals as the cost of goods and services increases. COLAs are often applied to social security benefits, wages, and pensions to help recipients meet the cost of living.

Milani Notshe

Research Specialist

Last Updated

June 24, 2025

Read Time

June 24, 2025

what Cost-of-Living-Adjustment (COLA)?

As a business owner or human resources manager, you may come across Cost-of-Living Adjustments (COLA) in the context of employee compensation. COLA refers to periodic increases in salaries or benefits to match the rising costs of essential goods and services due to inflation. Implementing COLA helps maintain employees' purchasing power, ensuring their standard of living remains consistent despite economic fluctuations. This practice can enhance employee satisfaction and retention by demonstrating the organization's commitment to fair compensation.

For example, if the annual inflation rate is 3%, a company might increase all employees' salaries by 3% to offset the increased cost of living. This adjustment ensures that employees can continue to afford necessities such as housing, food, and transportation, thereby maintaining their financial well-being and motivation at work.

Are Companies Required To Offer COLA?

No, offering a Cost of Living Adjustment (COLA) is not mandatory for most companies. COLA is typically a voluntary benefit that companies may choose to provide to help employees keep up with inflation and rising living costs. However, in some cases, COLA might be included in employment contracts or union agreements, making it a requirement for those specific situations.

In the private sector, companies have the discretion to decide whether or not to offer COLA, and the amount or frequency of such adjustments may vary, and depend on the costs of employees. For government employees or in unionized industries, COLAs are more commonly included as part of compensation agreements.

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What Is The Difference Between A COLA And Wage Increases

The key difference between a Cost of Living Adjustment (COLA) and a wage increase lies in their purpose and how they are applied:

Key Difference	COLA	Wage Increases
Purpose	The main goal of a COLA is to maintain an employee's purchasing power in the face of rising living costs due to inflation. It is specifically designed to offset inflation by adjusting wages or benefits based on the increase in the cost of goods and services, usually tied to an indicator like the Consumer Price Index (CPI).	Wage increases are typically performance-based or market-driven. They are intended to reward employee contributions, reflect increased responsibilities, or align salaries with industry standards or labor market conditions. Wage increases are not directly related to inflation or the cost of living.
Application	COLA adjustments are usually uniform and apply to all employees or a specific group such as social security beneficiaries, and wage earners in a certain region. The adjustment is often applied annually to reflect the rate of inflation, regardless of individual performance.	Wage increases are more individualized. They can be based on an employee’s job performance, promotion, skills, or tenure. Wage increases are not automatically linked to inflation but are decided by employers.
Timing	COLA adjustments are generally made on a regular, often annual, schedule to keep up with inflation.	Wage increases may occur at various times, such as during annual reviews, promotions, or market evaluations, depending on company policies or performance evaluations.
Determining Factors	The percentage of COLA is determined by external economic factors, such as changes in the Consumer Price Index (CPI) or other inflation measures.	Wage increases are based on internal factors such as company performance, employee contributions, and salary benchmarking against industry standards.

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How Is A COLA Calculated In The U.S.?

Cost-of-living adjustments (COLA) are calculated based on changes in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W), which is published by the Bureau of Labor Statistics. Here’s a breakdown of how COLA is typically determined:

CPI-W Comparison: The Social Security Administration (SSA) compares the average CPI-W for the third quarter (July, August, September) of the current year with the average CPI-W of the third quarter from the previous year.
Percentage Change: If the CPI-W has increased, the SSA calculates the percentage change between the two periods. This percentage is used as the COLA.
Adjustment for Benefits: The percentage increase is then applied to social security benefits and other programs like Supplemental Security Income (SSI) for the following year.

For example, if the average CPI-W for the third quarter of 2023 is higher than that of 2022 by two percent, a two percent COLA would be applied to benefits starting in 2024.

This ensures that the purchasing power of social security recipients (particularly senior citizens and others on fixed incomes) is maintained, even as inflation causes prices to rise.

This is the most commonly used calculation, however, should a company decide to provide a cost-of-living adjustment, they are free to use the calculation that suits them best. For example, a company may take the inflation rate and other indicators into consideration.

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The Importance of Cost of Living Adjustments

Cost of living adjustments are critical for maintaining the financial stability of individuals on fixed incomes, such as social security beneficiaries. Without these adjustments, recipients' ability to afford basic necessities like housing, healthcare, and food would decline as inflation erodes the value of their income. By tying benefits to an index like the CPI, COLAs ensure that vulnerable groups, including senior citizens, can continue to meet their needs.

When you use Playroll, you're able to ensure that your international workforce is properly compensated, especially in regions where the cost of living fluctuates. With our tools and guidance, businesses can stay compliant with local regulations and benefits. Book a chat with one of our experts to find out how we can help grow your team, without the red tape.

Cost of Living Adjustment FAQs

What is the cost of living adjustment for 2025?

The cost of living adjustment (COLA) for social security benefits in 2025 is expected to be 2.5 percent in the U.S., according to the Social Security Administration.

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Does the COLA increase affect everyone in the U.S.?

While COLA increases benefit millions of people in the U.S., especially Social Security recipients and certain government employees, they do not apply to everyone, particularly those working in the private sector or who are self-employed.

How do you calculate your COLA increase In the U.S.?

To calculate your COLA payment for 2025, multiply your monthly payment by 2.5 percent. This figure plus the amount you received in 2024 will give you the new payment for the new year.

ABOUT THE AUTHOR

Milani Notshe

Milani is a seasoned research and content specialist at Playroll, a leading Employer Of Record (EOR) provider. Backed by a strong background in Politics, Philosophy and Economics, she specializes in identifying emerging compliance and global HR trends to keep employers up to date on the global employment landscape.