A Cost-of-Living Adjustment (COLA) is an increase in benefits or salaries to counteract inflation. COLAs are increases in salaries or hourly rates to help employees maintain the value of their compensation against inflation. They are calculated based on changes in the prices of essential consumer goods and services. COLAs are not viewed as merit increases resulting from good job performance, but rather as a way to maintain the employees earning power.

The Social Security Administration applies a COLA to payments made to those receiving Social Security and Supplemental Security income (SSI) . For 2023, the COLA increase is 8.7%, which is significantly larger than the COLAs in recent years. The COLA effective for December of the current year is equal to the percentage increase (if any) in the CPI-W from the average for the third quarter of the current year to the average for the third quarter of the last year in which a COLA became effective.

Some companies build salary adjustments into their compensation structures to offset the effects of inflation on their employees. Workers who belong to a union may have a cost-of-living adjustment, sometimes referred to as a cost-of-living allowance, built into their contract. However, only 11% of U.S. employers award COLAs to employees. Private companies typically rely on merit increases, promotions, and the market value to determine salary raises.

In summary, a COLA is an increase in benefits or salaries to counteract inflation. They are calculated based on changes in the prices of essential consumer goods and services. While some companies and unions incorporate COLAs, they are not commonly awarded by U.S. employers.