To calculate a cost-of-living adjustment, subtract the older Consumer Price Index value from the newer one, divide the result by the older value, and multiply by 100. That percentage is the COLA. Everything else — which CPI to pull, which months to compare, whether a cap applies — is about choosing the right inputs and handling what comes after.
The Three-Step Formula
Written as one expression: ((Current CPI − Base CPI) ÷ Base CPI) × 100 = COLA percentage.
Broken into steps:
- Find the change. Subtract the base-period CPI from the current-period CPI.
- Divide by the base. Take that difference and divide it by the base-period CPI.
- Convert to a percentage. Multiply by 100, then round according to whatever rule applies (Social Security rounds to the nearest tenth).
That is the whole calculation.1Social Security Administration. Cost-of-Living Adjustment (COLA) The judgment calls sit around it, in the two inputs you feed the formula.
Pick the Right CPI
There is no single “CPI.” The Bureau of Labor Statistics publishes several, and the version you use depends on what is being adjusted.
CPI-W for Social Security and Most Federal Benefits
The Consumer Price Index for Urban Wage Earners and Clerical Workers tracks households where at least half of income comes from hourly-wage or clerical jobs. Social Security, Supplemental Security Income, VA disability compensation, and most other federal benefit programs tie their annual COLA to the CPI-W.2Social Security Administration. Cost-of-Living Adjustment (COLA) Information
CPI-U for Broader Use
The Consumer Price Index for All Urban Consumers covers a wider population, including salaried workers, the self-employed, retirees, and the unemployed. Many private contracts default to CPI-U because it reflects broader spending patterns. Both indexes are published on the BLS website.3U.S. Bureau of Labor Statistics. Consumer Price Index Home
Chained CPI-U for Federal Tax Figures
The Internal Revenue Code requires tax brackets, the standard deduction, and most other inflation-adjusted tax figures to use the Chained Consumer Price Index for All Urban Consumers. The chained version accounts for the fact that when prices rise, people substitute cheaper alternatives, so it grows about 0.25 percentage points more slowly per year than the traditional CPI-U.4Congressional Budget Office. Differences Between the Traditional CPI and the Chained CPI The statute naming it is IRC § 1(f)(3).5Office of the Law Revision Counsel. 26 USC 1 – Tax Imposed
If you are running a calculation for a private agreement and the contract does not name an index, CPI-U is the typical default.
Pick the Two Dates to Compare
The other input choice is timing. A COLA compares CPI at one point to CPI at another, and the rule for which two points varies by program or contract.
Social Security follows a locked-in calendar. The agency averages the CPI-W for July, August, and September of the current year, then compares that Q3 average to the Q3 average from the last year a COLA was determined. If the percentage change is positive, that is the COLA, rounded to the nearest tenth. If prices are flat or falling, the COLA is zero; benefits never decrease.2Social Security Administration. Cost-of-Living Adjustment (COLA) Information
Private COLA clauses vary. Some compare September to September, others February to February, and others rely on a 12-month trailing average ending in a specific month. The contract language controls, so read it before running the numbers. A clause that says “the CPI” without more will need interpretation; a clause that specifies both the index and the lookback months does the work for you.
Apply Any Caps, Floors, or Formula Modifiers
Once you have the raw percentage, check whether the program or contract limits it.
The Federal Employees Retirement System uses a modifier tied to the size of the CPI increase:
- CPI increase of 2 percent or less: full percentage.
- CPI increase above 2 percent but no more than 3 percent: capped at 2 percent.
- CPI increase above 3 percent: CPI increase minus 1 percentage point.
So a 2.8 percent CPI increase produces a 2 percent FERS COLA, not 2.8 percent.6Office of the Law Revision Counsel. 5 USC 8462 – Cost-of-Living Adjustments Civil Service Retirement System retirees, by contrast, receive the full percentage, rounded down to the next whole dollar.7U.S. Office of Personnel Management. How Is the Cost-of-Living Adjustment (COLA) Determined Under both systems, a first-year retiree’s COLA is prorated by one-twelfth for each month of benefits received.
Private contracts commonly set a ceiling (often 3 or 5 percent) and a floor (often 1 or 2 percent, sometimes zero). If your contract sets a 1 percent floor and a 4 percent cap, and the CPI rose 5.2 percent, you apply 4 percent. If it rose 0.3 percent, you apply 1 percent.
Simple Versus Compound
Contracts also differ on whether each year’s percentage applies to the original payment (simple) or to the current payment already inflated by prior adjustments (compound). Take a $50,000 annual pension with a 3 percent COLA. Under the simple method, the increase is $1,500 every year, because it is always 3 percent of the original $50,000; after 25 years the pension reaches $87,500. Under the compound method, year two’s 3 percent applies to $51,500, producing a $1,545 raise; after 25 years the compound approach pushes the pension past $100,000. Most government pension systems compound. Private contracts vary, so check.
Turn the Percentage Into a Dollar Amount
Multiply the COLA percentage by the current payment, then add the result to the current payment. A monthly alimony payment of $2,000 with a 2.8 percent adjustment rises by $56, bringing it to $2,056. Document the new amount in writing and notify the other party. Most contracts specify when the new amount takes effect, typically the anniversary date or the start of a calendar year; if yours is silent, resolve that in writing before the next payment is due.
A Worked Example: The 2026 Social Security COLA
To see every piece together, walk through the calculation the Social Security Administration performed for 2026.
- Index: CPI-W.
- Base period: Q3 2024 average of 308.729.
- Current period: Q3 2025 average of 317.265.
- Step 1: 317.265 − 308.729 = 8.536.
- Step 2: 8.536 ÷ 308.729 = 0.02765.
- Step 3: 0.02765 × 100 = 2.765 percent, rounded to the nearest tenth = 2.8 percent.
The SSA announced the 2.8 percent increase on October 24, 2025, and the higher payments began arriving in January 2026.8Social Security Administration. Social Security Announces 2.8 Percent Benefit Increase for 2026 A benefit of $2,000 per month, multiplied by 2.8 percent, rises by $56 to $2,056. If that beneficiary also has Medicare Part B premiums deducted from the check, the net increase in the deposited amount will be smaller than $56, because a higher Part B premium can absorb part of the COLA. That is a separate calculation from the COLA itself.
The same three-step formula produces the answer whether you are checking Social Security’s math, running a FERS retiree’s adjustment, or applying a clause in a commercial lease. What changes is which CPI you pull, which two dates you compare, and which caps, floors, or modifiers apply after the raw percentage is in hand.