Legal Definitions - cost-of-living adjustment

A Cost-of-Living Adjustment (COLA) is an automatic change, either an increase or a decrease, in a regular payment amount. This adjustment is specifically designed to help the recipient's purchasing power keep pace with changes in the cost of everyday goods and services. The adjustment is calculated using official economic data, typically provided by the federal government, which tracks inflation and the general cost of living.

Here are some examples of how a Cost-of-Living Adjustment (COLA) might apply:

• Social Security Benefits: Imagine an elderly individual who relies on their monthly Social Security check for living expenses. Each year, the Social Security Administration may announce a COLA. If the cost of living has increased, their monthly benefit payment will automatically go up by a certain percentage. This ensures that their fixed income can still cover essential expenses like groceries, utilities, and medication, preventing the erosion of their purchasing power due to inflation.

• Spousal Support Payments: In a divorce settlement, a court might order one party to pay spousal support (alimony) to the other for several years. To ensure the recipient can maintain a reasonable standard of living over time, the court order or settlement agreement might include a COLA clause. For instance, the annual spousal support amount could automatically increase by a percentage tied to the Consumer Price Index (a common measure of inflation) each year. This prevents the real value of the support payments from diminishing as the cost of housing, food, and other necessities rises.

• Pension Plans: Many retired workers receive a pension from their former employer. Some pension plans include a COLA provision. For example, a retired teacher's monthly pension might be adjusted upwards annually based on a pre-determined COLA formula. This means that even years after retirement, their pension income will periodically increase to reflect the rising cost of living, helping them maintain financial stability and avoid their retirement savings losing significant value to inflation.