A cost of living adjustment (COLA) is an increase in pay or benefits that typically occur due to the rise in the price of goods and services.
When you need to relocate your employees, it is essential to consider the cost of living and how it will impact you and your team.
For example, If you are moving your employees from rural Pennsylvania to San Francisco, you can expect the cost of living to be more expensive than you are used to. Continue reading below to learn more about cost of living adjustments and how they pertain to business relocation.
What Is a Cost of Living Adjustment?
The COLA definition means the cost of living adjustment. This is an increase made to Supplemental Security Income (SSI) and Social Security to help prevent the effects of inflation.
COLAs are usually equal to the percentage increase for a specific period in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). The average prices of a basket of goods are represented in the Consumer Price Index (CPI) and are used to measure inflation.
For 2022, the COLA increase was 5.9 percent. This means that if someone received Social Security benefits in 2021 of $10,000, they would’ve received $10,590 for their annual benefit in 2022. COLA is commonly used when companies are in the process of relocating.
Understanding COLA
COLA is used to protect against inflation in compensation-related contracts, government benefits, and real estate contracts because the cost of inflation was so high in the 1970s. The United States Bureau of Labor Statistics (BLS) determines the CPI-W, used by the Social Security Administration (SSA) to calculate COLAs.
What Does COLA Mean and How Does It Work?
To determine the formula for the cost of living adjustment, or COLA adjustment, you need to apply the percentage increase in the CPI-W from the third quarter of one year to the third quarter of the next year. This information is regularly updated on the website for SSA.
How to Calculate Cost of Living Adjustments
There are a variety of ways to calculate the cost of living adjustments.
1. Cost of Living Index
A Cost of Living Index can be used to determine how much you should pay an employee who is relocating. This index will compare the costs of living by region or by city. To compute the cost of living, you need to:
- Set the cost of living to 100 in your current city
- Determine the average price of similar items, like groceries, healthcare, and transportation in each city
- Determine the difference in percentage between the prices of each item
- Find the average of percent differences for all items
- If the cost of living in the new town is higher by 20 percent, the cost of living index equals 120
2. Consumer Price Index for Urban Wage Earners and Clerical Workers
The SSA uses this type of CPI to compute inflation costs and make the cost of living raise adjustments to Social Security and Supplemental Security Income. The BLS follows the same steps as they do to calculate CPI but with items that affect specific demographics to calculate CPI. Some examples of these demographics include:
- Households where there is at least one person who has been employed for at least 70 percent of the year
- Homes where at least half of the total income is from wage-paying or clerical jobs
3. Consumer Price Index
To figure out how to adjust salaries because of inflation, many companies use the CPI. CPI is the most common tool used to measure inflation costs. The BLS calculates changes in CPI by:
- Listing over 80,000 items that represent purchases in the average household. These purchases include the costs of groceries, housing, healthcare, transportation, education, and recreation.
- Conducting surveys across the country to determine the average costs of these items
- Weighing categories of items by order of importance to figure out the average CPI
- Calculating each category’s CPI by dividing the current year’s average cost by the base year’s average cost, then multiplying that total by 100
4. Consumer Price Index for All Urban Consumers
The consumer price index for all urban consumers (CPI-U) measures the average change in costs consumers pay for services and goods over time. It is a more broad measurement of changes in cost than the CPI-W because it includes more demographics. These demographics include:
- Self-employed professionals
- Temporary workers
- Clerical workers
- Technical workers
- Retirees
- Wage-earners
Why Does the Cost of Living Increase?
The cost of living increases due to inflation, which is the persistent increase in the average price level. Employee wages should go up. Many companies cannot afford to increase salaries, resulting in corporate downsizing.
Final Thoughts
With the cost of living rising, corporate downsizing and involuntary terminations are becoming more common. Companies need to understand how the cost of living adjustments can help counteract the effects of inflation.
While some businesses need to lay off their employees to remain afloat, other companies need to downsize their companies altogether.
If you are considering a company or office relocation, ARC Relocation can help. ARC can help take the stress out of corporate relocation for you and your employees. Book a complimentary call today so we can discuss your relocation.