Cost of living adjustments, known as COLAs, involve an increase in your pay to offset an increase in costs of living due to inflation or within a specific geographic region. Being informed about cost of living adjustments can help you determine when and how to negotiate for an increase in your pay that will help you maintain your buying power. In this article, we discuss everything you need to know about cost of living adjustments including when and how you can negotiate for a cost of living adjustment.
What is a cost of living adjustment?
A cost of living adjustment is an increase in pay that is meant to help you maintain a certain standard of living when facing inflation or moving to a new geographic location. Cost of living adjustments should help you keep your purchasing power the same despite rising costs. These types of pay increases are associated with the rate of inflation or with the cost of living in a particular area compared to the national average rather than being connected to the quality of work you perform.
Why cost of living adjustments are important
Cost of living adjustments are important because they help you create a budget that allows you to keep up with rising costs of goods and services that are considered necessities such as food, clothing and housing.
Average cost of living increase per year
The Social Security Administration has used automatic cost of living adjustments determined by the U.S. Bureau of Labor Statistics based on the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) since 1975. Since its inception of automatic adjustments, the average cost of living increase per year is 3.7%, with a high of 14.3% and a low of 0. If there is no increase in the CPI-W for the year, then there is also no cost of living increase.
When does the national cost of living increase?
The national cost of living increase is calculated by the U.S. Bureau of Labor Statistics around October of each year and becomes effective in January the following year. The CPI-W is calculated from the third quarter of the last calculation year to the third quarter of the current year. Many private sector employers who offer their employees a cost of living adjustment make their increases effective at the beginning of the company’s fiscal year.
When to negotiate for a cost of living adjustment
You may consider negotiating a cost of living adjustment with your employer when you realize your income no longer allows you to purchase the same amount of goods and services you have been able to afford in the past. A reduction in your purchasing power may be the result of inflation in costs or from moving to an area that has a higher cost of living.
5 tips to negotiate for a cost of living adjustment
Follow these steps to help you successfully negotiate a cost of living adjustment:
- Establish yourself as a valuable employee.
- Do your homework.
- Choose the appropriate time.
- Ask with confidence.
- Follow up after your meeting.
1. Establish yourself as a strong employee
The first thing you need to do before you can consider negotiating a cost of living adjustment is to establish yourself as a valuable employee. Doing this will show your employer you are worth paying more to encourage you to stay with the company long-term. Establishing your worth is a critical first step to any salary or raise negotiation.
2. Do your homework
You should also make sure you complete thorough research to determine whether you can justify needing a cost of living adjustment and how much before asking your employer to talk about it. You may want to consider how your current salary compares to the national or regional average salary for your position, the amount of money your employer contributes to your benefits and whether you have received any other salary increases related to merit.
You should also research to determine what the consumer price index calculations and national cost of living adjustment rates are. Having this information will prepare you to justify your request for a cost of living increase when you meet with your employer. And even if your current salary or benefits are higher than average, if you have established your value and done your homework you may still be able to successfully negotiate a cost of living adjustment.
3. Choose the appropriate time
Timing is always important when asking for a pay raise. You should try to notify your employer that you would like to discuss a cost of living pay increase with them and ask if you can schedule a meeting at a time that is convenient to them. This gives the employer notice of the topic you want to discuss and also shows you respect their time.
4. Ask with confidence
It is important to always show confidence in your skills, knowledge, experience and worth when negotiating for a cost of living adjustment. Your employer should be able to tell you have done your research and can support the need and value of offering your a cost of living pay raise. If you show confidence when asking for an increase, your employer is likely to feel more confident in agreeing to your request.
5. Follow up after your meeting
It is always polite to follow up with a professional meeting regarding salary or raise negotiations with a thank-you card. In addition to being respectful to your employer, this also helps you paraphrase what was discussed during the meeting and to get your understanding of the discussion in writing. You should expect your employer to provide you with their agreement or offer in writing.