COLA vs the Merit Raise: The Inflation the Government I...

Every October the federal government publishes an official inflation number and then quietly reorganizes a large part of its budget around it. The number is the Social Security cost-of-living adjustment, the COLA, and it is not a suggestion. By law it raises Social Security retirement checks, disability checks, and the Supplemental Security Income benefit rate by the same percentage, automatically, the following January. Tens of millions of benefit payments are indexed to it. So is a good deal of the tax code, and so, through a parallel mechanism, are the pensions of federal retirees. The government looks at the year's inflation, writes it down, and holds those obligations harmless against it.

The private paycheck gets no such treatment. There is no statute that indexes a wage to the COLA, or to anything else. A raise is a discretionary decision an employer makes out of a "salary budget," and for most workers in most years that budget lands somewhere between 3 and 4 percent, or lower, or nothing. The result over the last five years is a clean natural experiment in what indexing is worth. The indexed side of the economy got the full acknowledged inflation number. The un-indexed side got a merit bump that, even at a twenty-year high, came in under it, and the worker who got the "lucky" 2 to 3 percent fell further behind every single year.

The number the government admits to

The COLA is computed from a specific, published price index: the Consumer Price Index for Urban Wage Earners and Clerical Workers, the CPI-W, measured as the change from the third quarter of one year to the third quarter of the next (Social Security Administration). Whatever that comes out to is the raise, no negotiation, applied across the board.

Here is the run of adjustments this decade, each effective in January of the year shown:

2021: 1.3 percent
2022: 5.9 percent
2023: 8.7 percent, the largest since 1981
2024: 3.2 percent
2025: 2.5 percent
2026: 2.8 percent

Those come straight from the SSA's COLA series (Social Security Administration; AARP's year-by-year history). Compounded together, a benefit that existed at the start of 2021 is about 26.8 percent larger by January 2026 purely from the COLA, before any change in a person's underlying earnings record.

The reach of that one percentage is the part most people underestimate. The same COLA applies to retired-worker benefits, to Social Security Disability Insurance, and to the federal benefit rate for Supplemental Security Income, the program for the aged, blind, and disabled poor. You can watch it move a real dollar figure: the SSI federal benefit rate for a single person went from 794 dollars a month in 2021 to 967 in 2025 to 994 for 2026, each step exactly the COLA percentage above (Social Security Administration SSI amounts). The average retired-worker benefit, about 2,071 dollars a month for 2026, and the average disabled-worker benefit, about 1,630, both float on the same escalator (Social Security Administration 2026 COLA fact sheet). None of these recipients had to ask, perform, or renegotiate. The raise was written into law.

The raise on the other side of the line

Now the wage. The cleanest measure of the deliberate private raise is the annual salary-increase budget, the pool an employer sets aside to move existing employees' pay. Surveys from WorldatWork, Mercer, and others track it closely, and the striking thing is how little it moved even when inflation was screaming.

In 2021 that budget averaged around 3 percent. Employers were caught flat-footed by the 2022 inflation and scrambled: WorldatWork found U.S. salary budgets rose to an average of about 4.1 percent in 2022 and again in 2023, which it called a twenty-year high (WorldatWork). Since then the number has drifted back down: actual increases came in around 3.6 percent total (3.3 percent for merit) in 2024, near 3.5 percent in 2025, and are projected around 3.5 percent for 2026 (Mercer via WorldatWork; SHRM).

Set that against the COLA and the gap is immediate. In 2023 the retiree on the indexed side got 8.7 percent. The worker on the un-indexed side, in the best raise year in two decades, got about 4.1 percent, less than half. In 2022 it was 5.9 against roughly 4.1. The indexed benefit tracked the acknowledged inflation. The wage did not, even at its high-water mark.

Compounded across the whole 2021 to 2026 window, the arithmetic is stark:

The COLA: about 26.8 percent.
The record-high salary budget path: roughly 24 percent.
A typical merit-only raise near 3.3 percent a year: under 20 percent.
A steady, "if you are lucky" 2.5 percent a year: about 16 percent.
A flat 2 percent, which plenty of workers got or fell below: about 12.6 percent.

The person indexed to the government's inflation number came out roughly 27 percent ahead of where they started. The person taking the common 2 to 3 percent merit bump came out 12 to 16 percent ahead. That spread, ten to fifteen points opened up in five years, is not a rounding error. It is the price of not being indexed.

Two honest complications belong here, and they cut in both directions. First, the salary-budget number understates what some workers actually got, because the hottest raises in 2021 and 2022 went to people who switched jobs or got out-of-cycle adjustments, not to those who stayed put and took the annual merit review. The Atlanta Fed's Wage Growth Tracker, which follows individuals, peaked near 6.7 percent in mid-2022, with job-switchers well above job-stayers (Federal Reserve Bank of Atlanta). So the aggregate wage ran hotter than the merit table, but it ran hot precisely for the people willing and able to move, which is the opposite of a guaranteed, no-action raise. Measured broadly, in fact, the aggregate wage roughly kept pace with the COLA over the full window: the Employment Cost Index for private wages rose about 23 percent over the five years through 2025, and Social Security's own W-2-based Average Wage Index rose about 26 percent over the four years through 2024 (Bureau of Labor Statistics ECI; Social Security Administration AWI). So the honest headline is not that the COLA lapped every wage measure. It is that the indexed benefit got its raise automatically and guaranteed, while the wage-earner only kept pace by moving jobs, negotiating, or catching a composition wave, and the one who did none of those, the stay-put worker taking the annual 2 to 3 percent, fell behind all of them. Second, adjusted for prices, real average wages actually fell in 2021 and 2022, when inflation outran pay, and only clawed back in 2024 and 2025 (Bureau of Labor Statistics real earnings). The indexed benefit never took that real cut, because indexing is exactly the mechanism that prevents it.

The medical wedge: the compensation that never reaches the paycheck

There is a second reason the private raise feels thinner than the survey number, and it belongs in any honest comparison with the indexed side, because the indexed retiree has Medicare while the worker has an employer plan whose cost is climbing. In 2024 the average employer family health plan cost 25,572 dollars a year, up 7 percent in a single year. The worker paid 6,296 of that out of their own check, and the employer paid the remaining 19,276 (KFF 2024 Employer Health Benefits Survey). On top of the premium sat an average single-coverage deductible of 1,787 dollars before the plan pays for much of anything.

Be fair about the trend. Over the five years through 2024, family premiums rose about 24 percent, which KFF itself notes is roughly in line with wage growth near 28 percent and inflation near 23 percent over the same stretch. Health premiums did not obviously outrun wages in that window, and it would be dishonest to say they did. The point is not that premiums exploded past pay. The point is where the money goes. That 19,276 dollars the employer pays is real compensation the worker earns, and every dollar of it is a dollar that did not become a cash raise. Economists call this the health-cost wedge: when the price of the benefit rises, it absorbs money that would otherwise land in the paycheck, which is one reason cash wages can stagnate even as total compensation drifts upward. The package may keep pace. The spendable wage, the part that actually pays the mortgage, the utility bill, and the car insurance, is held down by the benefit line stacked on top of it.

The worker's own out-of-pocket share has also shifted the wrong way over the longer run, with deductibles growing faster than wages over the past decade and moving more of the first-dollar risk onto the employee, so the same nominal coverage quietly covers less each year (KFF). The retiree on the indexed side faces the Medicare Part B clawback described below, but Medicare at least caps and socializes a large part of the exposure and rides on a benefit that is nominally indexed. The working household carries its roughly 6,300-dollar premium share and its 1,787-dollar deductible out of a paycheck that moved 3 percent, and it carries the invisible 19,000-plus-dollar employer share as compensation it genuinely earned and will never get to spend.

Who is inside the indexed system, and who is not

The COLA is the most visible index, but it is not the only one, and the pattern of who gets covered is the whole story. Federal civilian retirees under FERS and CSRS receive an annual COLA tied to that same CPI-W (Office of Personnel Management). Federal employees still working get an annual pay raise set by law and the President, which ran 4.6 percent in 2023 and 5.2 percent in 2024, tracking inflation far more closely than the private merit table did (Office of Personnel Management pay). Military basic pay rose 5.2 percent in 2024 and 4.5 percent in 2025, with an extra bump for junior enlisted. Many state and local pension systems carry their own COLA clauses, and about 86 percent of state and local government workers have a defined-benefit pension at all, against roughly 15 percent in the private sector (Bureau of Labor Statistics). Even the government's suppliers have a version of it: when inflation spiked in 2022, the General Services Administration temporarily lifted its usual caps so federal contractors could raise their contract prices for inflation, an escalator handed to the government's vendors that its own wage-earners never got (PilieroMazza), while defense contract obligations climbed roughly 10 percent in a single year to about 466 billion dollars in fiscal 2023 (CSIS).

The dividing line is not public versus private in some abstract sense. It is indexed versus un-indexed. If your income is bolted to a published inflation measure by statute or contract, the last five years held you roughly harmless. If it was set by a manager's annual budget, you absorbed the gap. That is what the user of this site put plainly, and it is correct: the COLA, the disability adjustment, and the SSI raise are the government publicly acknowledging inflation, while most private jobs, if lucky, only ever move 2 to 3 percent a year unless they happen to be aligned with a state or federal formula. The acknowledgment exists. Most workers just do not have their name on it.

The quiet clawbacks, so this is not a fairy tale about benefits

Indexing is a shield, not a windfall, and the same government that grants the COLA has built in several ways to take part of it back. It is worth being precise, because overstating the benefit side would be as dishonest as ignoring the wage side.

The clearest clawback is Medicare. The standard Part B premium, deducted directly from most Social Security checks, rose from 148.50 dollars a month in 2021 to 185.00 in 2025 and then jumped 9.7 percent to 202.90 for 2026 (Centers for Medicare and Medicaid Services). That is about 37 percent over the same window the COLA compounded roughly 27 percent, so the fastest-rising bill most retirees have is outrunning the raise meant to cover it. Every dollar of that increase eats into the COLA before the retiree ever sees it.

The second clawback is stealthier and hits through the tax code. Social Security benefits become taxable above certain income thresholds: 25,000 dollars for a single filer, 32,000 for a couple. Those thresholds were written in 1983 and 1993 and have never once been indexed for inflation (Congressional Research Service). So every COLA that raises a benefit also pushes more retirees over a line that has not moved in three or four decades, quietly converting more of the "raise" into taxable income. It is the exact opposite of indexing, aimed at the same people.

And there is a live argument that the COLA understates seniors' true inflation in the first place. The Bureau of Labor Statistics maintains an experimental index, the CPI-E, weighted toward the medical care and housing that older households spend more on (Bureau of Labor Statistics). Advocacy groups such as the Senior Citizens League, which should be read as an advocacy source, argue that tying the COLA to the CPI-W rather than the CPI-E has let Social Security lose a large share of its buying power since 2000. The direction is contested and the CPI-E has not run higher every year, but the point stands that even the indexed side is not perfectly protected.

Debasement, and who is positioned to bear it

There is a harder claim underneath all of this, and it deserves to be stated carefully rather than either asserted or dodged. The federal government spends about 7 trillion dollars a year and borrows something like 1.8 trillion of it, financing the difference with debt (Congressional Budget Office). One school of thought holds that deficit-financed spending is itself a contributor to the inflation that erodes a wage. That causal claim is genuinely contested. The 2021 to 2023 inflation had many drivers, including supply shocks, energy, and pandemic disruption, and honest economists disagree about the weights. This piece does not try to settle it.

What is not contested is the structure, and the structure is the point. The government indexes its own obligations to the inflation number it publishes, holding benefit recipients and its own retirees and employees roughly whole. It does not index the private wage. So whatever the mix of causes, the erosion lands hardest on exactly the people with no index: the un-indexed, mostly private, mostly non-union worker whose raise is a manager's discretionary line item. Inflation is a transfer, and indexing decides which side of the transfer you are on. Being "aligned with state or federal" formulas, in the reader's phrase, is not a small perk. It is the difference between keeping pace and slowly losing.

The response is not outrage, and it is not to begrudge a disabled worker their SSI raise, which is a floor no one should want lowered. The response is positional. If a wage is the one input in the economy that comes with no index and no guaranteed return, the move is to get onto an indexed ladder where you can, the public-sector and unionized paths whose raises are written into a contract rather than a budget, and to convert some of the un-indexed wage into owned assets that the code treats gently and that tend to rise with, or ahead of, the very inflation that debases the paycheck. That is the whole argument of the companion piece on the toll economy, and the jobs that come with an index are the subject of the piece on the paths that beat the private raise.

The government tells you the inflation rate every October. The question is whether anything with your name on it is indexed to the answer.

Fact-check notes and sources

Every figure was checked against a primary or authoritative source; links are inline.

The COLA percentages (1.3, 5.9, 8.7, 3.2, 2.5, and 2.8 percent for 2021 through 2026, with 8.7 percent the largest since 1981, computed from the third-quarter CPI-W): Social Security Administration COLA series, SSA latest COLA, and AARP's history. The roughly 26.8 percent compounded figure is derived by multiplying those adjustments.
The same COLA applying to retirement, SSDI, and the SSI federal benefit rate, and the SSI rate moving from 794 dollars (2021) to 967 (2025) to about 994 (2026): SSA SSI amounts. Average benefit figures are from SSA.
Private salary-increase budgets (about 3 percent in 2021, a twenty-year-high near 4.1 percent in 2022 and 2023, about 3.6 percent total and 3.3 percent merit in 2024, near 3.5 percent in 2025 and projected 2026): WorldatWork, Mercer via WorldatWork, and SHRM. The compounded comparison figures are derived from these annual rates.
The job-switcher premium and the mid-2022 peak near 6.7 percent: Atlanta Fed Wage Growth Tracker. Real average wages falling in 2021 to 2022 then recovering: BLS Real Earnings.
The aggregate wage roughly keeping pace (private-industry Employment Cost Index up about 23 percent over the five years through 2025; the SSA W-2-based Average Wage Index up about 26 percent over the four years through 2024): Bureau of Labor Statistics ECI and Social Security Administration AWI. The windows differ by a year, and the aggregate measures include job-switching and composition effects, so they are not a stand-in for the individual stay-put raise.
Federal retiree and employee indexing (FERS and CSRS COLA tied to CPI-W; federal pay raises of 4.6 percent in 2023 and 5.2 percent in 2024; the 86 percent versus 15 percent pension-access gap): OPM, OPM pay, and BLS.
The Medicare Part B clawback (148.50 in 2021 to 185.00 in 2025 to 202.90 in 2026, a 9.7 percent jump, deducted from the check): CMS 2026 fact sheet. The un-indexed benefit-taxation thresholds of 25,000 and 32,000 dollars, set in 1983 and 1993: Congressional Research Service. The experimental CPI-E: BLS; the buying-power-loss claim is from the Senior Citizens League, an advocacy group, and is flagged as contested.
The medical wedge (2024 average family premium 25,572 dollars, worker share 6,296 and employer share 19,276, single-coverage deductible 1,787, and the five-year premium growth of about 24 percent against roughly 28 percent wages and 23 percent inflation): KFF 2024 Employer Health Benefits Survey. The health-cost-wedge point, that rising benefit costs suppress cash wages, is a well-documented pattern in labor economics.
Federal spending and borrowing (about 7 trillion in outlays, roughly 1.8 trillion borrowed): Congressional Budget Office. The link from deficit spending to inflation is presented as one contested reading, not a settled finding.

This post is informational and journalistic, not financial advice. It describes public benefit formulas, published wage surveys, and documented tax rules; it does not allege wrongdoing, and reasonable economists disagree about the causes of inflation.

COLA vs the Merit Raise: The Inflation the Government Indexes For, and the Wage It Leaves Behind