COLAs

We've got to hold on to what we've got
It doesn't make a difference if we make it or not
--Bon Jovi

Many agreements that include routine payouts, including many transfer payments, include "cost of living adjustments." COLAs are multipliers that, nearly always, increase the payout by estimated cost of living increases. These estimates typically come from the government sponsored change in the 'Consumer Price Index' or CPI.

If the CPI is deemed to increase 3% annually, then a $100 payout that employs CPI-based COLAs  would increase to $103.

The rationale behind COLAs is that payouts need to be revised for higher prices of goods and service over time. Without a COLA, the reasoning goes, a $100 payout buys less over time.

Beyond issues of manipulation to CPI metrics, which seem to elude the awareness of most people, is the widespread belief that prices naturally go higher over time. This is an erroneous assumption. As society becomes more productive, the natural direction of prices is down--not up.

Higher prices are due to aggressive force being applied somewhere in the system. Typically, this force takes the form of a) outright money printing, or b) suppressed interest rates that gradually rob the system of capital necessary for productivity improvement.

In unhampered systems, COLAs would typically revise routine payouts lower.