A cost of living raise, also referred to as a cost of living adjustment (COLA), is a wage increase intended to help employees cope with rising prices due to inflation. Unlike wage adjustments that are based on the employee’s work performance, employers look at market price indexes to determine the pay hike percentage. This is also typically given to all employees—with everyone receiving the same percentage increase. However, there are instances when the cost of living increase is only awarded to specific team members given location-related job changes and other factors.
Aside from answering the question “What is a cost of living raise,” this guide will tackle how it is calculated and if employers are required to give workers a cost of living adjustment annually. We’ll also provide examples of cost of living raises.
Key Takeaways
- Employers aren’t required to provide cost of living raises unless it is mandated by law or stipulated in an employee contract, union agreement, or benefits plan.
- Good data sources for identifying the percentage increase to give are the Bureau of Labor Statistics’ Consumer Price Index (CPI-W) report and the Social Security annual COLA report.
- The Social Security Administration’s COLA percentage for 2024 is 3.2%.
Why Provide Cost of Living Raises
Providing a salary adjustment for cost of living is a good way to improve productivity, boost staff engagement, and retain employees. Workers will feel more motivated to work and won’t likely look for another job if their wages are enough to cover essential living expenses (such as food, housing, gas, and utilities). You can even use it to convince team members to relocate to another state for work if the cost of living in that location is higher.
For more tips on preventing top talents from leaving your company, check out our employee retention guide.
Cost of living raises can also help you attract qualified candidates. You can add COLA-related pay hikes to the perks or benefits that workers get, especially if you regularly provide this to employees.
Apart from employee salaries, cost of living adjustments are applied to benefits like Social Security. This allows retirees to enjoy an increase in their Social Security benefits to help offset inflation. Some retirement plans even implement COLA so individuals who receive monthly or annual retirement income would be able to afford basic living expenses during times of inflation.
How to Calculate Cost of Living Raises
For cost of living pay adjustments, employers look at national or regional market price indexes to determine the percentage increase to give. Many use the Bureau of Labor Statistics’ Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W), which shows price changes of goods and services that a typical person or household buys.
When the CPI-W increases to a certain percentage, the cost of living pay rise is usually the same as that percentage. This is applied to the annual salary and is typically given to all employees at the same time, with everyone getting the same percentage increase.
Aside from the CPI-W, some businesses look at the Social Security Administration’s COLA report. It shows the cost of living adjustments to Social Security benefits that retirees receive, but you can use it as a benchmark or as a basis for the wage increase you plan to give. For 2024, the COLA is 3.2%.
Note that there isn’t a standard cost of living increase—this changes depending on inflation. The pay hike percentage and price index source also vary from company to company.
Cost of Living Raise Examples
You may be wondering, if the COLA for 2024 is 3.2%, how much is a cost of living raise for individuals receiving salaries or retirees getting benefits (like Social Security)? Fortunately, computing the applicable increase is very easy. Here are a few examples.
- Salary Increase
- Social Security Benefits Increase
Scenario | COLA Computation | New Annual Salary |
|---|---|---|
Sally receives an annual salary of $50,000 | $50,000 X 0.032 = $1,600 (this is the COLA amount) | $50,000 + $1,600 = $51,600 |
Scenario | COLA Computation | New Annual Salary |
|---|---|---|
Ann’s annual Social Security benefit is $10,000 | $10,000 X 0.032 = $320 (this is the COLA amount) | $10,000 + $320 = $10,320 |
Are Employers Required to Give Cost of Living Adjustments?
Providing cost-of-living wage increases isn’t mandatory for employers, but there are instances when you have to implement it. Below are a few scenarios.
- Mandated by law or an agreement: You have to comply if the annual cost of living adjustments are required by law or if it is included in employee contracts and benefits plan documents.
- Union-negotiated increase: Some unions may ask to include COLA increases in their contract. If you agree to it during the negotiation process, then you have to process COLA for employees who are members of that union.
- Work relocation: If a work assignment will require you to relocate an employee to a city or state with a higher cost of living, then you have to give COLA. To identify the percentage increase, take a look at that city or state’s cost of living index.
While most employees will only provide a salary adjustment for cost of living if they encounter the above scenarios, some include this when they create payroll budgets for the year. A ResumeBuilder study about anticipated 2024 pay raises shows that 69% percent of its 600 survey respondents are planning to give COLA to their workers. Nearly half of those say that the increase will be around 3% or less.
If you plan to include COLA in your payroll calculations, partnering with a payroll provider will help ensure accurate and smooth implementation. For suitable options, check out our best payroll services and top payroll software guides.
Frequently Asked Questions (FAQs)
There is no legal requirement for employers to provide COLA unless it is stipulated in a worker’s contract or a union agreement. However, offering it as a discretionary increase can make your employees happy, improve staff engagement, and boost worker productivity.
Yes, they can. As an employer, you decide whether or not to grant the request. However, before saying “no,” consider why your employees are asking for it. If the reason is because of a company-mandated work relocation in a city or state where the cost of living is higher, consider offering a COLA. It might entice them to move, as well as prevent potential staff resignations from happening.
Bottom Line
As the price of basic items increases due to inflation, you may have to give a cost of living raise to workers. This isn’t mandatory for most employers, but offering it will enable your staff to earn money to pay for basic living expenses. It also helps improve productivity and employee engagement.
There isn’t a standard rate for cost of living adjustments. However, you can look at consumer price indexes and the Social Security Administration’s annual COLA announcements to determine the percentage increase to give.
