Does COLAS lead to income inequality?

This year we have seen an inflation problem – higher than at any time since the 1970s. It seems to be slowing down at the moment, but inflation will continue to be an issue for the next few years due to the Ukrainian crisis and of climate change.

In the 1970s, we devised a major way to deal with the problem of inflation – the cost of living adjustment, or COLA. The Social Security Administration and most retirement programs use the COLA to determine increases in the amount of a person’s retirement benefits. Unions are negotiating for cost-of-living adjustments to wage rates.

Social Security recipients received a record COLA of 5.9% in 2022. This is the largest annual increase in about 40 years. Next year the COLA is expected to be even higher. In comparison, in 2021, benefits increased by only 1.3%.

COLAS looks at the increase in the cost of items in the Consumer Price Index (calculated monthly by the government) and gives everyone that amount. It seems like everyone should stay at the same standard of living they are enjoying now.

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I would say that is not true. People at the bottom of the income scale are much harder hit by price increases, and they don’t stay balanced. Earlier this year we saw a huge increase in gasoline prices. Fortunately, these prices have since dropped considerably. Who did they hurt the most? People who had to drive for their job.

We have seen significant rent increases, so high that many have been forced to move. It hasn’t affected people who own their homes. It didn’t even affect people paying mortgages, because those monthly payments stayed the same. Who was affected? Low-income people who could not afford to buy their home. This is a segment of the population that has grown dramatically since the Great Recession of 2008.

Food prices have risen dramatically. These prices will continue to rise as climate change will continue to increase the cost of production. Low-income people spend a much higher percentage of their income on groceries than high-income people.

COLAS are really easy for businesses and government to use to calculate revenue increases. They give everyone the same percentage. They don’t think about their CEOs and directors getting huge raises. But maybe people at the bottom of the salary scale haven’t received enough money to cover the rising cost of their health insurance, so their take-home pay is even lower.

When I was a young teacher, I remember going to a school board meeting where they decided to offer the same cost of living adjustment to everyone. I did some quick math and realized that the Superintendent of Schools had just gotten a raise that was greater than a first grade teacher’s total annual income. It hardly seemed fair.

Companies love COLAS. These increases are easy to calculate and justify. And those in power can get huge raises without their boards wondering if it’s the best choice. A 5% raise on a $10 an hour job works out to $1,040 per year, which seems like a nice raise. For someone making $100,000 a year, that’s $5,000 for a raise. $200,000 at 5% means an increase of $10,000. Each successive year, you will get a raise on all your previous raises. (Think compound interest) But all of these people have essentially the same dollar amount in increased spending.

Alliance City did something interesting this year. They calculated the cost-of-living adjustment on their set of salaries and wages, and then divided it equally among all employees. This meant that everyone who worked for the City received a raise of $1.00 per hour.

Income inequality has become a major issue in America, with gaps widening almost every year since the 1970s. Much of this inequality has been caused by the use of a COLA. Hopefully more companies and agencies will consider actions similar to Alliance City.

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