What Is a Cost of Living Adjustment (COLA)?

What Is the Purpose of a Cost of Living Adjustment?

The purpose of cost of living adjustments is to help recipients keep up with inflation. For example, the consumer price index (CPI)—the government's main measure of inflation—indicated the cost for all items except food and energy rose 3% year over year in October 2025. The price of food increased 3.1% and gasoline went up 4.1% over the same period. While the 2.5% COLA for Social Security benefits recipients doesn't completely offset the higher prices, it does help their purchasing power keep pace.

Other details to understand about COLAs include:

• They are meant to help maintain a lifestyle, not improve it. A COLA isn't intended to increase your purchasing power. Rather, it's designed to help you maintain your lifestyle based on changing prices for goods and services.
• Adjustments aren't based on job performance. COLA amounts are tied to inflation. If a COLA is being provided by an employer, it isn't a reward for good work. You can still negotiate with your employer to get a performance-based raise, however.
• COLAs are most common with Social Security and public pension plans. Retirees who receive Social Security benefits or who worked for government agencies may receive automatic adjustments each year. The COLA for public pension plans, for instance, could be particularly important for retired government workers who might not pay into or receive Social Security benefits. Private employers' defined benefits plans rarely offer COLAs.
• COLAs could depend on the local cost of living. Some COLAs are based on local rather than national inflation rates. For example, military members may receive a supplemental allowance to help them offset higher prices if they are stationed in high-cost areas. And some private employers may adjust salaries based on the cost of living where an employee lives.

Tip: A COLA can also affect your taxes because it raises your taxable income. Plan ahead so you don't owe when you file your taxes. This is especially applicable if the annual adjustment is a significant one that puts a portion of your income in a higher tax bracket.

How Does the Cost of Living Adjustment Work?

Cost of living adjustments can vary depending on the program or employer that provides them. Each one follows its own guidelines to determine how much the increase should be.

How Social Security Cost of Living Adjustments Work

The Social Security COLA is the most well-known one because so many people rely on these benefits. Nearly 71 million people who receive Social Security benefits and 7.5 million who get Supplemental Security Income (SSI) will get a COLA in 2026, according to the Social Security Administration.

The Social Security Act requires Social Security and SSI benefits to make COLAs each year. Here's how they work:

• Based on inflation: The adjustment depends on the third-quarter averages of the CPI for urban wage earners and clerical workers (CPI-W) for the current year and the previous year. The CPI-W focuses on the cost of specific goods and services that families in urban areas who make at least half their income from clerical or hourly wages regularly buy.
• Starts the next year: Benefits rise in line with the CPI-W increase (rounded to the nearest 0.1%), and the amount is announced near the end of the year. The increase starts in January of the next year.
• Never decreases benefits: Social Security benefits will stay the same if there's deflation or no increase in the CPI-W.

Since 1975, the Social Security COLA has raised benefits every year except 2009, 2010 and 2015.

How Other Cost of Living Adjustments Could Work

COLAs for other types of benefits, pensions and wages can vary because each may use its own formula and timeline.

For example, some agencies and organizations might use the more general consumer price index (CPI or CPI-U). Others may follow the CPI-W to calculate COLA amounts, and some may use a local CPI rather than a national one.

The program can also have different features that affect the COLA, such as:

• Automatic and ad hoc: The COLA may be automatic based on a predetermined rate or formula. There could also be a one-time, or ad hoc, COLA.
• Simple or compound: A COLA could apply only to your base rate, such as your original benefit amount when you retired. Conversely, it could compound with past COLAs.
• Inflation-based: Many COLAs are based on an inflation rate, but they can use different inflation data or use different amounts of the inflation rate.
• Performance-based: Pension plans often invest the money in the pension fund and may base COLAs on their investment returns.
• Caps and limitations: A program may cap the COLA and apply only a portion of your benefits. The plan could also delay your benefit until the end of a waiting period or when you reach a certain age.
• Delayed COLAs: Some COLAs have a waiting period and don't kick in until you've been retired for a specific period or reach a certain age.
• Self-funded: You may have the option to receive a lower benefit amount in exchange for an automatic annual COLA.

How Much Is the COLA for 2026?

The COLA for Social Security benefits in 2026 is 2.8%, and the increase will take effect starting in January. Here's what COLAs have looked like for the last several years.

The 2026 COLA is slightly higher than 2025's 2.5% but still far below 2023's 8.7%, reflecting how drastically inflation has fluctuated.

COLAs for other benefits may differ. For example, federal employees who are part of the Federal Employees Retirement System will receive a 2% COLA in 2026. Retirees receiving annuities from the Civil Service Retirement System will receive a 2.8% bump.

How to Calculate Your COLA Increase

You can calculate your COLA increase in dollar amounts by multiplying the COLA rate by your monthly benefits.

For example, the average Social Security benefit for a retired worker was $2,015 in 2025, according to the Social Security Administration. The 2026 COLA increase of 2.8% means their benefits will rise by roughly $57 ($2,015 x 0.028 = $56.42), and they'll now receive $2,071 each month.

Frequently Asked Questions

The Bottom Line

A cost of living adjustment helps people who receive Social Security or pension benefits keep up with rising prices. You may also get a COLA through your employer if they offer one or if a union contract requires it. But even if you receive a COLA, it might not fully offset all of the rising costs your paycheck has to cover. To do that—or better yet, to get ahead—you may need to explore other ways to fight inflation, such as increasing your income or improving your investment returns.