It's no fun to go shopping and discover the prices of the goods and services you need have gone up. This inflation eats away at the buying power of your money. The Social Security Administration incorporates cost-of-living adjustments into its benefit payments to combat the impact of rising prices. Some employers also use a COLA so that salaries are not eroded by inflation.
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Cost of Living and COLAs
Every October, the SSA publishes its cost-of-living adjustment. The COLA is based on the increase in the cost of living as measured by the Consumer Price Index. For example, the CPI increased 1.47 percent in 2013. To offset the increase, the SSA added a COLA of 1.47 percent to benefit payments for 2014. Employers can incorporate a COLA into salary contracts. Some employers use the SSA COLA as a basis for cost-of-living adjustments. Others base adjustments on regional price increases.