Cost-of-Living Adjustment (COLA) — Definition and What It Means for Your Income
An increase in income or benefits intended to keep pace with inflation.
A cost-of-living adjustment (COLA) is an increase applied to wages, pensions, or benefits to account for inflation, intended to preserve purchasing power over time. Social Security benefits receive an annual COLA based on CPI data.
Why it matters
Without regular COLAs, fixed incomes lose purchasing power every year as prices rise — understanding COLA helps assess whether income is keeping pace with the cost of living.
Example
If inflation is 3% in a given year and an employee receives a 3% raise explicitly framed as a COLA, their real purchasing power remains roughly unchanged — they're not better or worse off in real terms.
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Related terms
Cost-of-Living Adjustment (COLA) — FAQ
Do all employers offer COLAs?
No. COLAs are common in government and union jobs, and automatic for Social Security, but many private employers do not guarantee cost-of-living increases.