A cost-of-living allowance (COLA) is an additional payment to an employee’s salary or compensation over and above their wage grid to counteract the effects of rising prices for goods and services, ensuring their purchasing power is maintained.Essentially, it’s a way to adjust income to keep up with the increasing cost of living during periods of inflation.
- COLA helps members maintain their standard of living when prices increase for essential goods and services, i.e. housing, food, and transportation.
- COLAs are often tied to the Consumer Price Index (CPI), which measures changes in the cost of goods and services.
COLA
does not guarantee a specific wage increase per year, as it is based on the Consumer Price Index.
Why is it important?
COLA ensures that employees’ salaries keep pace with rising prices, preventing a decline in their real income.In areas with a high cost of living, offering a COLA can attract and retain skilled employees.COLA can improve job satisfaction by demonstrating that the employer understands and is addressing the challenges of rising living costs.
Examples:
OPTust plan includes a COLA to adjust for inflation, ensuring that retirees’ benefits maintain their value over time.COLA is often calculated based on the percentage change in the CPI over a specific period. If there is an increase in the CPI, COLA may be applied to increase wages by a certain percentage.
