A cost-of-living adjustment, or COLA, is an increase in pay or benefits designed to offset inflation so that purchasing power stays roughly the same. Social Security benefits rose 2.8% for 2026 under the annual COLA; private employers aren't required to give COLAs.
Key takeaways
- COLAs are tied to inflation, usually measured by the Consumer Price Index, not to performance.
- Social Security's 2026 COLA is 2.8%.
- Private employers rarely give a separate COLA; inflation is usually built into merit budgets.
- Union contracts and some government pay systems include automatic COLAs.
How cost-of-living adjustment works
In a formal COLA, pay rises by a set formula tied to an inflation index. Social Security uses the Consumer Price Index for Urban Wage Earners and Clerical Workers to set its annual adjustment, which was 2.8% for 2026 (PLANSPONSOR, Social Security COLA set at 2.8% for 2026). Some union contracts and pension plans also include automatic COLAs.
Most private employers don't use a separate COLA. Instead, they factor inflation, labor market data, and budget into the annual merit increase pool. Some give a general increase to all employees in high-inflation years, then a smaller merit layer on top.
Geographic pay differentials are related but different. They set pay by location to reflect local labor markets and costs, and they're often adjusted when an employee relocates.
Cost-of-living adjustment example
A credit union with a union contract gives tellers a COLA equal to the prior year's CPI change, capped at 4%. With a 2.8% index change, every teller's rate rises 2.8% on January 1. Non-union staff at the same credit union receive merit increases from a 3.5% pool instead, ranging from 0% to 6% based on performance.
Why cost-of-living adjustment matters for employers
Employees feel inflation directly, and pay that doesn't keep up feels like a cut. Compensation costs for private employers rose 3.3% in the year to June 2026, with wages and salaries up 3.1% (BLS, compensation cost growth to June 2026). Explaining how your increase pool compares with inflation helps employees understand decisions.
Calling every raise a COLA can backfire, though. If raises are labeled cost-of-living, employees may expect them automatically and see them as unrelated to performance. Be precise about what each increase is.
Common cost-of-living adjustment mistakes to avoid
Labeling merit raises as COLA
It blurs the link between pay and performance.
Promising automatic COLAs
Unless you intend a formula, avoid language that creates an expectation.
Ignoring pay compression
Across-the-board increases for new hires without adjusting current staff can compress pay.
Confusing COLA with location pay
Geographic differentials are separate from inflation adjustments.
Cost-of-living adjustment: questions people also ask
What is the 2026 COLA?
Are employers required to give cost-of-living raises?
What is the difference between COLA and merit increase?
How is a COLA calculated?
Do federal employees get a COLA?
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HRTally glossary entries are written by people who have run US payroll, benefits, and HR operations, then checked line by line against primary sources such as the IRS, Department of Labor, EEOC, and Bureau of Labor Statistics. Dollar limits and rates are for 2026 unless stated. We review every entry at least twice a year and whenever a rule changes. This page explains general rules and isn't legal or tax advice; state law can differ. Read our editorial standards.
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<blockquote>A cost-of-living adjustment, or COLA, is an increase in pay or benefits designed to offset inflation so that purchasing power stays roughly the same. Social Security benefits rose 2.8% for 2026 under the annual COLA; private employers aren't required to give COLAs.</blockquote><p>Source: <a href="https://www.hrtally.com/hr-glossary/cost-of-living-adjustment/">HRTally HR Glossary, Cost-of-living adjustment</a></p>
Written by the HRTally Research Team
Our guides are written and reviewed by people with hands-on US HR, payroll, and HR technology experience. Legal and tax facts are checked against primary sources, such as the Department of Labor, IRS, EEOC, and USCIS, and linked at the end of each guide. Vendors never review or pay for our editorial content.