What is a Cost of Living Raise?
It's that time of year again and you're hoping that you're up for a raise. At the very least, chances are that you'll receive a cost of living raise. But what exactly is a cost of living raise, when can you expect one (not everyone gets them!) and how will it be calculated?
Here's everything you need to know about cost of living raises.
What is a cost of living raise?
A cost of living raise, also known as cost of living adjustment (COLA), cost of living allowance or an escalator clause, is a raise you can get in order to cover the rising costs of living.
"A cost-of-living raise is an increase in pay that's intended to keep the buying power of an employee's salary the same during a period of inflation," according to How Stuff Works. "Without a cost-of-living raise, the declining value of the dollar would leave workers with less real money in their pockets."
It's important to keep in mind, however, that a cost of living raise isn't really a raise. You didn't earn the cost of living raise because of your hard work, in other words. Rather, you were given a cost of living raise in oder to keep your pay the same in relation to rising prices.
If you only received a cost of living raise and did not receive another merit-based raise, but feel that you deserve one, here's more on how to ask for a raise.
What are the costs of living?
Your costs of living don't include just anything and everything you use in life. Your costs of living don't include your unnecessary possessions, for example. Rather, your costs of living, legally, refer to your necessities.
"The cost of living is the amount of money needed to sustain a certain standard of living by affording basic expenses such as housing, food, taxes and health care," according to Investopedia. "The cost of living is often used to compare how expensive it is to live in one city versus another. The cost of living is tied to wages."
How is a cost of living raise calculated?
What percent is a cost of living raise? The answer is a nuanced one.
"In the U.S., most cost-of-living raises are based on the Consumer Price Index (CPI)," according to How Stuff Works. "The CPI is an approximation of how much someone must spend to attain a certain level of well-being. It measures the price of a 'market basket' of goods and services that a typical household buys. Because new products are always coming on the market and consumers tend to shift their buying choices as prices rise or fall, the CPI includes a statistical weighting that adjusts the raw price data."
In short, the Bureau of Labor Statistics (BLS), compiles the CPI measure based on the purchases of a sample of wage and clerical workers (known as the CPI-W). This is the most common and standard method of determining cost of living raises, though not all cost of living raises are linked to the CPI. Pay of federal employees, for example, is increased by the movement of the Employee Cost Index, which tracks pay levels for different jobs instead of prices.
The amount of a cost of living raise varies with inflation, which varies widely. Regular Social Security cost of living adjustments (COLAs) first started in 1975, when inflation was high, which meant that the first COLA was eight percent. That reached 14.3 percent in 1980 but, by the '90s, lower inflation led to smaller increases of about two to three percent a year. A spike in energy prices in 2008 meant a 5.8 percent increase, but inflation has never returned to '70s-level highs.
When there's no inflation, that doesn't mean much for workers. If the CPI drops, which is known as deflation, there's no pay cut. In fact, the recession reduced inflation to zero in 2009, which was the first year when Social Security recipients just simply didn't get a COLA.
In short, your cost of living raise (or lack thereof) will likely be a result of the CPI increases or decreases.
Let's look at an example: How much did Social Security increase in 2018 and 2019?
When Social Security grants a COLA, this means that the size of your paycheck increased. In 2019, the average monthly Social Security benefit will increase $39 to $1,461. This means that the maximum benefit for a worker at full retirement age will be $2,861 in 2019 — and it was $2,788 in 2018, according to RothIRA.com.
The raise might seem small, but it adds up over time.
When should you expect a cost of living raise?
You can expect a cost of living raise when it comes time for your company to go about handing out raises — this usually happens annually. If the CPI increased, you can likely expect a cost of living raise.
For example, the Social Security COLA is based on the CPI-W that's measured from the third quarter of the year prior to the third quarter of the current year, and the cost of living raise will become effective in December.
Of course, not everyone will get a cost of living raise, however. Some corporate, nonprofit and even military workers will receive a cost of living raise, but this isn't inclusive of all workers.
Some state laws require cost of living raises as part of state employee contracts. And government employees typically must receive cost of living adjustments. Likewise, if you're part of a labor union, the union might negotiate a cost of living increase for you and the participating employees. But while some employers are indeed required to give out cost of living raises, private employers do not have to give out cost of living raises.
This discrepancy in raises has led to more rapid wage increase for public workers than for private employees. From 1998 to 2008, for example, research suggests that public wages grew almost 29 percent, while private wages increased only 19 percent.
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AnnaMarie Houlis is a feminist, a freelance journalist and an adventure aficionado with an affinity for impulsive solo travel. She spends her days writing about women’s empowerment from around the world. You can follow her work on her blog, HerReport.org, and follow her journeys on Instagram @her_report, Twitter @herreportand Facebook.
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