Posted Sep 14, 2022 8:44 AM
By Patricia Jones, Alliance Community Task Force: Creating Opportunity
DO COLAS LEAD TO INCOME INEQUALITY?
This year we have seen a problem with inflation – higher than any time since the 1970’s. It seems to be slowing down right now, but inflation will continue to be a problem for the next few years because of the Ukraine crisis and climate change.
In the 1970’s 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 benefit. Labor unions bargain for cost-of-living adjustments to wage rates.
Social Security beneficiaries received a record 5.9% COLA in 2022. It marks the biggest annual increase in about 40 years. Next year the COLA is expected to be even higher. In comparison, in 2021 benefits went up by just 1.3%.
COLAS look at the increase in the cost of items in the Consumer Price Index (calculated by the government monthly) and give everyone that amount. This seems like everyone should stay at the same standard of living they are currently experiencing.
I would argue that that is not true. People at the lower end of the income scale are hit much harder by price increases, and they aren’t staying even. Earlier this year we saw a huge increase in gasoline prices. Thankfully those prices have since dropped considerably. Who did they hurt the most? People who had to drive for their jobs.
We saw major increases in rent, so high that many were forced to relocate. That didn’t affect the people who own their homes. It didn’t even affect people who are paying mortgages, as those monthly payments remained the same. Who was affected? Those with lower incomes who couldn’t afford to buy their houses. This is a segment of the population that has been growing dramatically since the Great Recession of 2008.
Grocery prices have gone up significantly. These prices will continue to rise because climate change will continue to increase the cost of production. Low income people spend a much larger percentage of their income on groceries as compared to high income people.
COLAS are really easy for businesses and government to use to figure income increases. They give everyone the same percentage. They don’t think about the fact that their CEOs and administrators get huge increases. But maybe the people at the bottom of the pay scale didn’t get enough to cover the increased cost of their health insurance, so their take-home pay is even less.
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 calculations and
realized the superintendent of schools just got a raise larger than the total annual income of a first-year teacher. That hardly seemed fair.
Businesses love COLAS. Those raises are easy to figure and to justify. And those in power can get huge raises without their boards of directors considering whether it is the best choice. An increase of 5% on a $10 an hour job is $1040 a year, which seems like a nice raise. For someone earning $100,000 a year, that’s $5,000 for a raise. $200,000 at 5% means a raise of $10,000. Each successive year you’ll get a raise on all your previous raises. (Think compound interest) But all these people have essentially the same dollar amount in the increase in their expenses.
The City of Alliance did something interesting this year. They calculated the cost of living adjustment on their total wage and salary package, then divided it evenly among all employees. This meant everyone working for the City is receiving a raise of $1.00 an hour.
Income inequality has become a major problem in America, with the gaps widening nearly every year since the 1970’s. A lot of this inequality has been caused by using a COLA. Hopefully more businesses and agencies will consider actions similar to the City of Alliance.