Definition
An automatic increase to a payment, such as Social Security benefits, a pension, or wages under some contracts, meant to keep pace with inflation. Social Security's COLA is set each year from a government consumer price index and applied to every beneficiary's check.
Why it matters
A COLA protects purchasing power; income without one shrinks in real terms every year. Retirees living on a fixed pension with no COLA can see their standard of living fall by a third or more over a long retirement.
Example
A retiree receives $2,000 a month from Social Security and $2,000 a month from a pension with no COLA. After a year of 3% inflation, a 3% COLA lifts the Social Security check to $2,060 while the pension stays at $2,000. Over 20 years of 3% inflation, that flat $2,000 buys what about $1,100 buys today.
Put it into practice
Related terms
This definition is educational, not financial, legal, or tax advice. U.S. rules and limits change; verify time-sensitive details with official sources. See our disclaimer.