Cost of Living Adjustment (COLA) Definition

Term Definition
Cost of Living Adjustment, known as COLA, represents the amount of monetary change in the cost of living within a particular geographic region during a given calendar year. The annual COLA is determined by the Social Security Administration (SSA) and given in the form of a percentage, which accurately identifies the change in the overall cost to maintain a certain standard of living. Employers often build a COLA amount into their employees’ salary contracts to account for the expected future increases in the cost of living. The SSA, also, annually adjusts the benefit amounts for recipients using the determined COLA percentage.

Extended Definition
A Cost-of-Living Adjustment is referred to as COLA by the Social Security Administration (SSA). The COLA is expressed as a percentage to identify the change in the overall cost of living over a calendar year.

The prices of products and services within a geographic region will determine that region’s specific cost of living. Normally, this cost will increase from year to year nationwide. As goods and services rise in monetary expense, the cost of maintaining a certain lifestyle will increase in direct correlation to these rising prices.

Every October, the SSA publicly releases this COLA percentage representing the change in the cost of living over the year to come. The COLA is applied to the benefit amounts of social security recipients to change the following year’s benefit amounts to reflect the recorded change in the cost of living.

A cost-of-living index, such as the Consumer’s Pricing Index (CPI), records these annually identified changes in the cost of maintaining a certain standard of living. The SSA bases their determination of the COLA on this index.

In the interests of the regional and national economies, employees’ salaries should incorporate a COLA amount.

Some employers take the annual COLA into consideration with regard to the salaries of their employees. The salary contracts incorporate measures to make future adjustments to the salary in response to the COLA amounts each year.

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