Cost-of-Living Adjustment - COLA

What is a 'Cost-of-Living Adjustment - COLA'

An adjustment made to Social Security and Supplemental Security Income to counteract the effects of inflation. Cost-of-living adjustments (COLAs) are generally equal to the percentage increase in the consumer price index for urban wage earners and clerical workers (CPI-W) for a specific period.

For example, if Kevin received $10,000 last year in Social Security benefits and the COLA for this year is 4.1%, his benefits for this year would be $10,410.

BREAKING DOWN 'Cost-of-Living Adjustment - COLA'

During the 1970s, inflation was very high. As a result, compensation-related contracts, real estate contracts and government benefits used COLAs to protect against inflation.

The Bureau of Labor Statistics (BLS) determines CPI-W, which is used by the Social Security Administration (SSA) to compute COLAs. The COLA formula is determined by applying the percentage increase in the CPI-W from the third quarter of one year to the third quarter of the following year.

Congress ratified a COLA provision to offer automatic yearly COLAs based on the annual increase in CPI-W that went into effect in 1975. Prior to 1975, Social Security benefits were increased when Congress approved special legislation. In 1975, COLAs were based on the increase in the CPI-W from the second quarter of 1974 to the first quarter of 1975. From 1976 to 1983, COLAs were based on the increases in the CPI-W from the first quarter of the previous year to the first quarter of the current year. Since 1983, COLAs are dependent on the CPI-W from the third quarter of the previous year to the third quarter of the current year.

Inflation levels were high in the 1970s ranging from 5.7 to 11.3% in 1979. In 1975, the COLA increase was 8%, and the inflation rate was 9.1%. In 1980, COLA reached the highest level in history at 14.3% while the inflation rate was 13.5%. Amid the 1990s, drastically lower inflation rates prompted small COLA increases averaging 2 to 3% per year.

The Effects of COLA on Recipients

COLA is reliant on two components: the CPI-W and the employer contracted COLA percentage. CPI determines the rate of inflation and is compared yearly. When consumer prices drop or if inflation has not been high enough to substantiate a COLA increase, recipients do not receive COLA. If there is no CPI-W increase, there is no COLA increase.

When a COLA increase is not approved, Medicare Part B premiums remain the same for about 70% of beneficiaries who get the premiums deducted from their Social Security checks. However, the remaining recipients such as those with higher incomes, those who did not participate in Social Security through their employer and new beneficiaries must pay the Medicare Part B premium increases.

Other Types of COLAs

Some employers such as the U.S. military occasionally give a temporary COLA to employees who are required to perform work assignments in cities with a higher cost of living than where they presently live. The COLA expires when the work assignment is finished.

RELATED TERMS
  1. Primary Mortgage Market

    The market where borrowers and mortgage originators come together ...
  2. 100% Mortgage

    A mortgage loan in which the borrower receives a loan amount ...
  3. Reverse Mortgage

    A type of mortgage in which a homeowner can borrow money against ...
  4. Mortgage Originator

    An institution or individual that works with a borrower to complete ...
  5. Secondary Mortgage Market

    The market where mortgage loans and servicing rights are bought ...
  6. Mortgage Pool

    A group of mortgages held in trust as collateral for the issuance ...
Related Articles
  1. Retirement

    A Guide to Arizona's State Retirement System

    The Arizona State Retirement System offers a defined-benefit plan for former teachers, state workers and public employees.
  2. Mutual Funds & ETFs

    2 Reasons to Be Wary of New ETFs (IFLY, EQLT)

    Pay attention to the number of thematic and smart beta ETFs that may fail to survive as a result of poor performance and thin trading volume.
  3. Forex

    Global Utilities: Exploring Revenue Trends & Fundamentals

    Analyze global revenue exposure in the utilities sector to learn about the impact of currency, regulation and economic growth on geographic contributions.
  4. Home & Auto

    4 Alternatives to a Traditional Mortgage

    If you can't qualify for or don't want a traditional mortgage, one of these options might be right for you.
  5. Home & Auto

    Understanding Mortgage Impound Accounts

    Home buyers with low down payments may get stuck with higher mortgage payments. Find out what you get for the extra money.
  6. Investing

    Municipal Bonds Offer Something More for Everyone

    Are municipal bonds really for me? The popular perception is that tax-exempt income only benefits those investors in the highest tax brackets.
  7. Retirement

    5 Top Alternatives to a Reverse Mortgage

    If you have substantial home equity and don't want to do a reverse mortgage to tap it for retirement expenses, cost out these viable alternatives.
  8. Credit & Loans

    What Is an Alt-A Mortgage?

    Called "liar loans" for their low documentation requirements, Alt-A mortgages were hot until the subprime crisis. Now Wall Street wants to bring them back.
  9. Home & Auto

    Understanding Mortgage-Backed Securities

    Find out the meaning of this popular asset-backed security and its benefits for banks and investors.
  10. Investing

    Berkshire Hathaway Stock: Capital Structure Analysis (BRK.A)

    Review the capital structure of Berkshire Hathaway, and understand how equity and debt capitalization and enterprise value may interact with each other.
RELATED FAQS
  1. How safe are money market accounts?

    Learn the difference between a money market account and a money market fund. Both savings vehicles are relatively safe, but ... Read Answer >>
  2. Why is Belize considered a tax haven?

    Explore the factors that make Belize one of the most modern and corporate-friendly tax havens in the world, including its ... Read Answer >>
  3. What is an assumable mortgage?

    The purchase of a home is a very expensive undertaking and usually requires some form of financing to make the purchase possible. ... Read Answer >>
  4. Why would a homebuyer need to take out PMI (private mortgage insurance)?

    Learn why some home buyers are required to take out private mortgage insurance (PMI), and how it affects the total monthly ... Read Answer >>
  5. Why does the majority of my mortgage payment start out as interest and gradually ...

    When you make a mortgage payment, the amount paid is a combination of an interest charge and principal repayment. Over the ... Read Answer >>
  6. What are the disadvantages of a Roth IRA?

    Get informed about Roth IRAs, which have a few disadvantages, including limited access to funds and contribution limits based ... Read Answer >>
Hot Definitions
  1. Physical Capital

    Physical capital is one of the three main factors of production in economic theory. It consists of manmade goods that assist ...
  2. Reverse Mortgage

    A type of mortgage in which a homeowner can borrow money against the value of his or her home. No repayment of the mortgage ...
  3. Labor Market

    The labor market refers to the supply and demand for labor, in which employees provide the supply and employers the demand. ...
  4. Demand Curve

    The demand curve is a graphical representation of the relationship between the price of a good or service and the quantity ...
  5. Goldilocks Economy

    An economy that is not so hot that it causes inflation, and not so cold that it causes a recession. This term is used to ...
  6. White Squire

    Very similar to a "white knight", but instead of purchasing a majority interest, the squire purchases a lesser interest in ...
Trading Center