What is a Cost of Living Adjustment?

A cost of living adjustment or allowance (COLA) can refer to several different ways in which salary or benefits, like retirement pay, may be adjusted upward to account for rising expenses in the cost of living. For many years, especially among union workers, pay increases in the form of cost of living adjustment were written into employee contracts. This is less common today, even in unions, though some argue that dispensing with these agreements has sorely hurt workers or those receiving retirement benefits. When a cost of living adjustment is in place, increases in salary are often based on the consumer price index (CPI). The consumer price index is a current measurement of what goods and services used by most households cost. When the CPI rises, as it did in the mid 2000s, especially with the price of food and gasoline, some workers with a COLA may see their salary automatically rise to meet these new costs. COLAs remains in place for many people collecting government pensions, ...  more