Here, you will learn the Cost-of-Living Adjustment definition and other aspects related to this topic. The Cost-of-Living Adjustment (COLA) is the growth in an income or benefit that is measured on a yearly or another regular time basis. This increase allows the income or benefit to keep the same level of purchasing possibilities.
What Are the Reasons That Make Cost of Living Adjustment Necessary?
Usually, everything gets more expensive from one year to another. This phenomenon is known as inflation. Of course, you could always find some particular exemptions. Consumer electronic products are one of them. Nowadays, there is a tendency to low manufacturing costs due to mass production, making these kinds of products cheaper to customers in this competitive market. Yet, the general rule beats the exemptions.
So, inflation increases the average costs on a regular base. Assuming that the economic conditions will be the usual next year, all would be more expensive than this year: house and rental charges, fuel for your vehicle, or even the cost of your mobile home insurance.
Despite the cost-of-living adjustment definition, it is not an increase as such. It is intended to allow your income to match the rate of inflation. This way, your purchasing power from one year to the next stays the same, and you would not have to face a worse financial situation than the one you had the previous year.
The Cost-of-Living Adjustment and An Increase Based on The Present Inflation Rate: Are They the Same Thing?
These two things are not precisely the same. When you have an income increase at the same level as the current rate of inflation (or the CPI), you are still a little worse off than the previous year. And why, you might ask. Well, the rise you have received is tax deducted, and the tax rate is usually the highest that you pay. Therefore, the cost-of-living adjustment should be, in fact, higher than the present inflation rate. This is the only way your purchasing possibilities could keep pace with retail pricing.
Are There Any Other Kinds of Cost-of-Living Adjustments?
The answer is yes; you could find another cost-of-living adjustment. Regarding disability insurance, your Florida insurance company might provide adjustments on your insurance policy based on the CPI-U, so you can get monthly benefits in accordance with the inflation.
People whose jobs involve traveling to other places inside the country or a foreign country need it. Their employers could pay them the provisional cost of living adjustments to make their incomes enough to maintain the same purchasing power in the new location.
A typical example is the US Service for people working in Japan. There, the prices are considerably higher than in the United States. According to their pay grade and other aspects, the typical serviceman based in Japan could receive from $300.00 to $ 700.00 more than they earn in the US as the cost-of-living adjustment is paid while working in Japan.
This payment would be canceled once the employee is back to the usual place of work or, in the case of a serviceman of the previous example, when they are posted in a different location.