Cost-of-Living Adjustment (COLA)
Summary Definition: An increase in wages or benefits designed to counteract the effects of inflation, preserving purchasing power and maintaining a consistent standard of living.
What is a COLA?
A cost-of-living adjustment (COLA) is a periodic wage or benefits increase that reflects overall rising prices in the economy. These adjustments help individuals maintain their purchasing power and everyday quality of life.
Sometimes referred to as a “cost-of-living increase,” COLA rates are updated annually and based on a combination of economic trends and consumer price data, such as the Bureau of Labor Statistics’ (BLS) Consumer Price Index (CPI).
The most commonly referenced cost-of-living increase benchmarks are the Social Security Administration’s (SSA) rates for its Social Security and Supplemental Security Income (SSI) programs. Both programs set a new rate at the start of each year and frequently use the same one.
No federal or state law, however, requires employers to use COLAs. Instead, they’re often included in collective bargaining agreements or implemented voluntarily to retain talent and support financial well-being.
Key Takeaways
- Cost-of-living adjustments are wage or benefit increases designed to help offset the rising costs of everyday goods and services.
- Employers aren’t required to adopt COLAs, though the Social Security Administration (SSA) annually updates COLA rates for Social Security and Supplemental Security Income (SSI) beneficiaries.
- The 2025 Social Security COLA increase is 2.5%, based on consumer price index data from Q3 2023 to Q3 2024.
Social Security COLA History
Since 1975, the SSA has annually updated Social Security and SSI COLA rates based on price shifts of essential goods and services, including food, housing, and transportation.
On average, annual COLA rates are approximately 3.3%, though the rate peaked at 14.3% in 1980. Conversely, there have been three instances (2009, 2010, and 2015) where no COLA increase was necessary.
| Year | HSA |
| 2020 | 1.6% |
| 2021 | 1.3% |
| 2022 | 5.9% |
| 2023 | 8.7% |
| 2024 | 3.2% |
| 2025 | 2.5% |
Why Does a Cost-of-Living Adjustment Matter?
Cost-of-living adjustments provide financial security for millions of individuals by ensuring that wages and benefits remain aligned with inflation.
This can affect employee satisfaction and retention while helping retirees and disability benefit recipients afford necessities like food, housing, and healthcare. The 2025 Social Security COLA alone impacts nearly 68 million beneficiaries, and the SSI increase affects almost 7.5 million recipients.
How Does a COLA Work?
Every year, the SSA uses inflation data from the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) to calculate whether a Social Security COLA increase is necessary.
Calculating Cost-of-Living Adjustments
Since 1983, the SSA has used CPI-W data from the third quarter of the prior year to the current year's third quarter to calculate cost-of-living adjustment rates. If a COLA is needed, the percent difference in CPI-W data becomes the new COLA rate (rounded to the nearest tenth of a percent), and wages or benefits are increased accordingly.
For example, the Social Security increase for 2025 was based on comparing the average price rate from Q3 2023 to the average rate from Q3 2024. The comparison showed that, on average, prices in 2024 were 2.5% higher than those from 2023. Therefore, a COLA for 2025 was set at 2.5%.
So, if a retiree received $12,000 in social security benefits in 2024, their 2025 benefits will increase to $12,300 ($12,000 x 0.025 = $300).
Other COLA Types
Employers aren’t legally required to provide COLAs to their employees. So, when they do, they’re also not required to use SSA rates or national CPI-W data. Other types of adjustments include:
- Pre-determined percentage increases automatically applied annually
- Ad hoc adjustments for individuals who must temporarily work in a more expensive city
- Annual increases based on local or regional consumer data
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