A cost of living adjustment (COLA) is an adjustment made to social security benefits or to employee wages in order to counteract the effects of inflation. As inflation increases, the benefits received for Social Security must also increased in order to account for the increase in the cost of living.
A cost of living adjustment is also known as a cost of living allowance.
The use of cost of living adjustments to counteract inflation happened during the 1970s, when inflation in the U.S. was extremely high. These adjustments are periodic increases in wages or salaries in order to compensate for any loss of purchasing power due to the high rate of inflation in the economy. The cost of living will rise as the value of money drops and the cost of goods increases. In such a scenario, the benefits one receives from Social Security will be inefficient to provide for the increase in cost of living unless such benefits are also increased.