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This fact sheet explains what colas are, why they matter for retirees, and how they help maintain purchasing power in the face of inflation. It also discusses the importance of proper funding for colas and their impact on retirement systems.
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A cost of living adjustment (COLA) is a change in one’s monthly retirement benefit to account for increasing prices. COLAs help to ensure that your purchasing power remains the same no matter how long you may live, and how quickly prices might rise. For example, if your retirement benefit is $1,000 per month, you can purchase a certain amount of goods or services with that income—groceries, prescriptions, utilities, etc. However, if the prices of those goods and services increase by, say, 3% in a single year, you can purchase fewer goods with that $1, benefit—your “purchasing power” has declined. If you receive a COLA based on this increase in prices, however, then this year’s benefit would increase to $1,030 per month. Thanks to your COLA, you will have the same purchasing power—or the same ability to purchase those same goods—that you did last year with your $1, benefit.
A cost of living adjustment (COLA) is a change in one’s monthly retirement benefit to account for increasing prices or inflation. When it comes to COLAs…
COLAs may not seem so significant—you may wonder, how important is just $30 per month? Yet rising prices and inflation can very quickly erode your retirement income, even to the point that a retirement benefit that was perfectly adequate to pay your monthly expenses when you retired can become inadequate over time. Like water cutting though a rock, even a modest rate of inflation can significantly erode your purchasing power over time.^1 Figure 1 shows the rate of inflation in the U.S. for every year since 1982. The graph clearly shows that inflation has been positive in every year, except