Cost of Living Law and Legal Definition

The cost-of-living (also known as cost-of-living adjustment or COLA) is a statistic based on the increase in the Consumer Price Index used to calculate automatic benefit increases. Many benefits are affected by the rate of increase contained in the cost-of-living factor, including public benefits, support payments, and salaries, as well as pay raises of private employees. While state laws, which vary by state may require a cost-of-living increase in wages for public employees, private employers may include such an annual increase at their discretion. By making cost-of-living adjustments, earnings keep pace with the rate of inflation, or else future earnings decrease in buying power.

Most people are aware that there are annual increases in Social Security benefits to offset the effects of inflation on fixed incomes. In 1972 legislation the law was changed to provide, beginning in 1975, for automatic annual cost-of-living allowances (i.e., COLAs) based on the annual increase in consumer prices. Previously, beneficiaries had to await a special act of Congress to receive a benefit increase. Many other state and federal government benefits incorporate cost-of-living numbers into disbursement calculations.