What are COLA Adjustments?
The Cost-of-Living Adjustment (COLA) is a benefit that ensures that the value of the capital you hold stays at pace with inflation. Usually, one is entitled to this benefit after the second year of retirement, but the annual rate of inflation and the retirement law also might have some impact on it. Retirees are currently entitled to an annual COLA, which is paid in the May 1 warrant yearly.
The following 3 factors influence COLA
- The Consumer Price Index for All Urban Consumers (CPI, 1967), published by the Bureau of Labor Statistics (BLS)
- The COLA provision under the employment contract
- Retirement year
Consumer Price Index (CPI) and its connection with COLA
CPI is compared yearly to assess the rate of inflation. When COLA adjustments are made, your money’s value is determined using the CPI in effect at the time of retirement.
Contracted COLA Provision
Your COLA limit is determined by the COLA Provision you have agreed to. Public entities may contract for a 3, 4, or 5 percent COLA Provision, while the majority of state pensioners and all university employees contract for a 2 percent COLA Provision. The COLA limit every year is derived by compounding the COLA Provision.
Understanding Cost-of-Living Adjustment (COLA)
Since inflation was severe in the 1970s, COLAs were employed in agreements relating to salaries, real estate, and welfare payments to mitigate it. The Social Security Administration (SSA) calculates COLAs using the CPI-W, which is produced by the U.S. Bureau of Labor Statistics (BLS).
The COLA formula is a product of applying the percentage rise in the CPI-W from the third quarter of one year to the third quarter of the subsequent year.