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What Is a Cost-of-Living Adjustment and How Does It Work?

Cost-of-living adjustments (COLAs) are pay increases designed to help employees maintain their purchasing power as costs for essentials like housing, food, and energy rise. These adjustments are not tied to performance but serve to support employees during economic shifts. Watch the video to learn more about how COLA increases work and why they matter.

Topics:

0:16 - What Is a Cost-of-Living Adjustment (COLA)?
0:38 - Why Is It Important?
0:57 - What Is the COLA Increase for 2025?
1:11 - How Does a COLA Work?
1:35 - How Do Employers Benefit?
1:50 - How To Calculate a COLA Increase
2:24 - How the Cost of Living Impacts Your Business
2:42 - Navigate COLA With Ease

<p id="transcript-button">View Transcript</p>

What Is a Cost-of-Living Adjustment (COLA) and How Does It Work? Transcript

Economic uncertainty and rising prices can be panic inducing. If you're an employer or HR professional, you've likely heard the buzz around cost-of living adjustments—or COLAs.

A cost-of-living adjustment or COLA isn't tied to job performance or promotions.

Instead, it's an increase in employee pay designed to help keep up with rising prices for essentials like housing, food, and energy.

Think of it as a way to maintain your employees' buying power during times of inflation.

Why is it important? Here's the big question for businesses—why should cost-of-living raises matter to you?

Employees who can manage their expenses feel secure—and secure employees make for motivated, loyal teams. It's also a great way to stay competitive, particularly in today's tight labor market.

What is the COLA increase for 2025?

For 2025, the Social Security Administration announced a 2.5% increase in COLA based on rising costs tracked by the consumer price index.

How does a COLA work?

A COLA is typically an across-the-board percentage increase in pay. They are usually based on economic indicators like the Consumer Price Index or CPI, ensuring fair adjustments tailored to rising costs.

Some businesses even localize their COLA percentages, reflecting higher costs in larger metropolitan areas.

How do employers benefit?

Implementing COLA isn't just employee-friendly—it's business smart. It helps you attract top talent, retain your current team, and protect your organization's reputation as an employer that values its team.

How to calculate a COLA increase.

Here's how it plays out. Imagine your company calculates a 2.5% COLA based on this year's CPI.

An employee earning $50,000 gets an additional $1,250 annually.

Even small adjustments like this can go a long way in helping employees manage rising costs.

Adjusting for cost-of-living differences can make a real impact.

Employees in high-cost cities might need a slightly higher COLA than those in smaller communities.

How the cost of living impacts your business.

As we enter 2025, aligning wages with cost-of-living adjustments is one of the smartest moves you can make for talent acquisition and retention.

It's not just about staying competitive—it's about showing your employees that you truly value their contributions.

Want to simplify the process?

Collaborate with Paychex and start building a compensation plan that rises with the times.

Paychex can help you manage HR, payroll, and more with our all-in-one solution. And remember—an investment in your team today is an investment in your company's future.