How to Calculate a Cost-of-Living Adjustment (COLA)
At ChurchSalary, we frequently get questions about how to calculate a cost-of-living adjustment for staff. Admittedly, it can be a daunting task.
ChurchSalary has cultivated resources, maps, and links below to help you. Gather the appropriate data. Contextualize it using personal knowledge of your community. Then filter it through your church’s compensation philosophy in order to calculate a cost-of-living adjustment.
Table of Contents
- Basic Expenses
- Purchasing Power
- Income and Cost of Labor
The basic goal of a cost-of-living adjustment (COLA) is to either (1) adjust nationwide salary figures to suit your location and/or (2) to adjust salaries on an annual basis to offset inflation.
- To account for the local cost of living, every ChurchSalary report includes a county-level cost-of-living index (COLI) figure based on your ZIP code.
- To account for inflation, the Social Security Administration (SSA) publishes a COLA every year. Beginning in December 2022 (through 2023), the SSA will increase benefits by 8.7 percent to account for inflation. Dig deeper into the impact of inflation in 2022.
The temptation is to simply multiply salaries at your church by one (or both) of these figures. However, for the following reasons, your church may need to draw on multiple data points when calculating a COLA.
First, as we explored in a recent article, wages in your county do not correlate one-to-one with COLI. Some areas are simply more expensive (or affordable) to live in than others.
Second, employees at your church likely reside in different neighborhoods, ZIP codes, and even multiple counties. Because the cost of living is heavily influenced by housing and this cost is never uniform, you probably need to use more than one cost-of-living index (COLI) number.
Finally, just because Social Security recipients will receive larger payments in 2023, that doesn’t mean employee compensation will (or should) increase by exactly 8.7 percent. While the SSA bases its cost of living adjustment on the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W)The CPI-W is a “monthly measure of the average change over time in the prices paid by urban wage earners and clerical workers for a market basket of consumer goods and services. The CPI-W is based on the spending patterns of urban wage earners and clerical workers. Index data are available for the US City Average (or national average), for various geographic areas (regions and metropolitan areas), for national population size classes of urban areas, and for cross-classifications of regions and size classes. Individual indexes are available for more than 200 items (e.g., apples, men's shirts, airline fares), and over 120 different combinations of items (e.g., fruits and vegetables, food at home, food and beverages, and All items).”, this index is subject to volatile swings caused by the price of certain goods such as gas, used cars, and hotels.
The more likely indicator of how salaries in the marketplace may increase is core inflation. Coincidentally, as of June 2022, annual core inflation was between 4.8 and 5.9 percent and average employment compensation costs for civilian workers increased by 5.1 percent. However, almost no employees are seeing their salary increase at the same rate as inflation. Wages are falling behind. Research the latest figures in our recent article on inflation and make a reasonable decision that works for your budget and extends kindness to the employees at your church.
To calculate a COLA to localize salaries, every church needs to gather data that takes the following questions into account:
- Basic Expenses How much does it cost to live and thrive in your community versus the country as a whole?
- Purchasing Power How far will an employee’s salary stretch in your area?
- Cost of Labor Are workers paid more or less in your local economy than the national average?
Demographic information about your community is captured and presented at different levels by the federal government.The four main levels at which you need to gather data are your (1) ZIP Code, (2) census tract, (3) county, and (4) metropolitan statistical area (MSA). Compare each of these with the nation as a whole or with each other (e.g., county versus MSA). Research the levels or geographic designations of your community here.
ZIP codes reflect mailing routes not neighborhoods. Census tracts are more likely to capture the smallest neighborhood divisions in your community. Government agencies use larger regions called metropolitan statistical areas (MSA)Metropolitan statistical areas, as defined by the United States Office of Management and Budget (OMB), reflect “a core area containing a substantial population nucleus, together with adjacent communities having a high degree of economic and social integration with that core.” to track data for your local economy or metro region.
A salary that works for a pastor rural Alabama may leave a pastor homeless in San Francisco. Are you paying employees enough to afford housing, food, healthcare, transportation, and other basic expenses?
Because COLI is heavily influenced by the local real estate market, churches should quantify the cost of housing and/or rent in order to assess whether their employees can afford to purchase/rent a home, or rent an apartment.
Map: Rent and Home Prices
The map below displays important housing and rent figures for each county and MSA: a home and rent price range (25th, 50th, and 75th percentile), the estimated monthly costs for homeowners (including real estate taxes)According to the US Census Bureau, the median selected monthly owner costs with a mortgage measure the monthly cost of “utilities (electricity, gas, water, and sewer)” as well as “real estate taxes; fire, hazard, and flood insurance on the property; utilities (electricity, gas, and water and sewer); and fuels (oil, coal, kerosene, wood, etc.) paid by the homeowner.”, median annual real estate taxes, the effective real estate tax rate (RET)The National Association of Homebuilders (NAHB) used 2010-2014 Census Bureau data to estimate the RET for 99.5 percent of US counties, including a lowest and highest RET based on census tracts, which reflects the lowest and highest property tax rates in your county. To estimate real estate taxes for your county, divide the price/value of a home by 1,000, then multiply by the RET (e.g., $250,000 ÷ 1,000 = 250 x 10.8 = $2,700). Together, these three RET figures can help you calculate a low, middle, and high estimate for property taxes in your county., and median gross rent (including utilities).According to the US Census Bureau, “median gross rent” reflects the midpoint of local “contract rents plus estimate average monthly cost of utilities (electricity, gas, water, and sewer) and fuels (oil, coal, kerosene, wood, etc.) paid by renters.”
Note that these values are drawn from 2015-2019 data (adjusted for 2019 dollars). To update these figures you can …(1) Calculate the percentage change between the median home value in this map and the median home value listed on the NAR website (link below). Apply this to other home values such as the first and third quartile home values or median monthly owner costs. (2) Use the FHFA HPI calculator to estimate a percentage change and apply that to the home and rent figures below. Compare the percentage change for all four quarters in 2019 (Q1-Q4) and the current valuation quarter (as quarterly rates vary), then apply an average 2019-2021 increase to home data in the map below. Remember that these are both estimates and that home value increases may not apply to rent.
Resource: Median Home Values
Consult this National Association of Realtors (NAR) map or PDF to see adjusted* median home values for Q2 2021 as well as an estimate of how much your local real estate market has increased between Q4 2020 and Q2 2021. This adjusted data may be especially helpful if you are putting together a salary package for a new employee.The National Associate of Realtors map is an adjustment of the median home values published above. The NAR adjusted county-level home values for both the five-year (2015-2019) and one-year (2019) American Community Survey data using the Federal Housing Finance Agency’s (FHFA) quarterly House Price Index (HPI). NAR mortgage payment estimates are based on a 10% down payment at a 30-year fixed-rate (fully amortized) and do not include insurance or real estate taxes. For non-adjusted county-level data, consult the Rent and Home Prices map above.
Pro tip:Calculate the percentage change between the median home values in the Rent and Home Price map (above) and the adjusted values listed on the NAR webpage. Use this percentage change to update 2015-2019 first and third quartile home values (from the map). For example, in DuPage County, Illinois the median home value increased by 11.7%. Applied to the 2015-2019 home range, the first quartile value would increase from $215.9k to $241k and the third quartile value would increase from $437.8k to $489k. Or visit the FHFA’s HPI calculator to estimate this adjustment yourself .
Resource: Living Wage, MIT
The Living Wage Calculator, created by Amy K Glasmeier at the Massachusetts Institute of Technology, estimates “the hourly rate that an individual must earn to support his or herself and their family” in your community or local economy. The “living wage” is akin to a flourishing or thriving benchmark.
These figures apply to individuals and assume that an employee works 40 hours a week (full-time). Extrapolate these figures to an annual amount by multiplying by 2,080 (i.e., 40 hours x 52 weeks = 2,080 hours per year.).This living wage estimate is an attempt by researchers at MIT to quantify the amount of money an individual needs to cover “food, child care, medical, housing, transportation, civic, and other” expenses. The listing for each county or MSA also offers a sample list of “typical annual salaries” based on BLS data.
Resource: Mortgage Calculator
Plug any of the above numbers into Google’s simple mortgage calculator to estimate a monthly payment, and by extension an annual housing allowance, for a pastor in your area.
Cost of Living
Explore the map below to see 2021 COLI figures Published by The Council for Community and Economic Research (C2ER), this figure reflects the relative cost of goods and services in your county versus the national average. for both your county and MSA, as well as Q4 2020 Regional Price Parities (RPP)Regional Price Parity (RPP) is another measure of the relative price level of goods, services, and housing. Consider it a comparison data point to help you contextualize the county and MSA-level COLI figures published by C2ER. RPP is particularly useful for churches in expensive communities because it tries to account for the ability of consumers to find less expensive goods (including housing) in your area. figures for your MSA (if data is available).Bear in mind that COLI does not capture inflation. For a measure of inflation, consult the CPI-W or core inflation index.
How to Contextualize COLI Data
At the most basic level, COLI is as an estimate of how far a salary will stretch or the purchasing power of an average national salary in your county or MSA.
Housing heavily impacts the COLI in your county. Because employees usually can find more afforable housing in nearby counties or neighborhoods, ChurchSalary recommends that you also consult the COLI figure for your metropolitan statistical area (MSA).
The COLI for your MSA reflects the maximum “stretch amount” an employee can expect from an average nationally comparable salary in your local economy.This MSA stretch amount may be significant and can reveal a lot about your metro region. For example, in some MSAs, like San Francisco, there is no refuge from expensive housing. By contrast, in the Chicago MSA, more affordable housing is often available in a nearby city/neighborhood.
Local Income and the Cost of Labor
Compensation in your local economy varies based on a lot of factors. However, as previously discussed, it rarely increases or decreases at the exact same level as either COLI or the CPI-WThe Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) is a monthly measure of the average change over time in the prices paid by urban wage earners and clerical workers for a market basket of consumer goods and services. The CPI-W is based on the spending patterns of urban wage earners and clerical workers. Index data are available for the U.S. City Average (or national average), for various geographic areas (regions and metropolitan areas), for national population size classes of urban areas, and for cross-classifications of regions and size classes. Individual indexes are available for more than 200 items (e.g., apples, men's shirts, airline fares), and over 120 different combinations of items (e.g., fruits and vegetables, food at home, food and beverages, and All items).(the index that SSA uses for their COLA). The map below displays several income measures at the county and MSA-level (with the percentage change between the national benchmark in parentheses) alongside ChurchSalary’s cost of labor estimate.To estimate the cost of labor (or labor difference), ChurchSalary calculated the percentage change between average BLS salary data for employees of “All Occupations” at the MSA or non-metropolitan level and the national level. This percentage change estimate reveals how much higher or lower the typical worker, on average, in your local economy is paid versus the national average.
How to Contextualize Income Data
Every income and salary measure for your county or MSA should be contextualized based on personal knowledge of your community. Ask yourself, “does (or should) this number reflect the income of employees and pastors at our church?”
Additionally, bear in mind that the percentage change between nationwide figures and your area (listed in parenthesis) is almost always more important than the raw number itself.
Median household income (MHI) reflects the income of all individuals who are living in a single house. This includes cohabitating (non-married) couples, multi-generational families, and non-related roommates.Income inequality and demographics can distort MHI in your community. If inequality is high, the median may reflect a no-man’s land in between white collar and blue collar households. The median may also reflect a high divorce rate, a high percentage of single-income households, or a common profession/industry in your community. As a result, MHI may or may not reflect the household income of employees at your church.
Investigate the demographics of your community and evaluate where your employees fall on the distribution chart of household incomes in your area based on their qualifications, responsibilities, and family situation.
Per capita income (PCI) reflects the total reported income divided by the population. The same factors (mentioned in the footnote above) that can distort MHI may also distort PCI in your community.
Cost of labor is a measure of how much more (or less) employees are being paid in your area as a result of supply and demand. To estimate a generic cost of labor, ChurchSalary compared “All Occupations” salary data at the MSA or non-metropolitan level with the national average. This figure estimates how much higher or lower the average worker in your local economy is paid versus the national average.Be aware that a substantial premium may be afforded to certain types of workers in your area because they are in high-demand. Using “All Occupations” to estimate the cost of labor is an attempt to flatten out these occupation-level differences. It also functions as an excellent proxy for pastors since the average salary for “All Occupations” ($56,310) and “Clergy” ($56,560) at the national level is virtually identical.
To better understand and contextualize income data for your community, you may need to do more research. Visit DataUSA.io to learn more about the demographics of your community.
Pro tip:Every full-time pastoral report includes a series of averages in the Localized Salary Recommendation section. You can calculate the percentage change between these localized averages and the nationwide average to get a sense of how salary in the real world increases or decreases depending on your region, COLI, MHI, and population density. Use these values as another set of income data points, much like the cost of labor.
To calculate a fair and reasonable COLA, your church should:
- Capture data at relevant geographic levels.
- Discuss these numbers with your personnel team.
- Contexualize this data using knowledge of your community.
- Then, calculate a COLA for your employees.
Remember to calculate a COLA that accounts for both location and inflation. Whatever you decide, document your process and/or reasoning. Sharing this with your staff will foster trust and transparency.
ChurchSalary is committed to condensing this information and providing it to our members. We are working to incorporate more cost-of-living adjustment data in our salary reports. For now, you can find all of these resources on this page. We will update these figures on an annual basis or as frequently as they are published by various government agencies.
Bonus: Practical Example
Download this worksheet (PDF) containing discussion questions and a practical example designed to help your church calculate a cost-of-living adjustment.
Click on the plus sign [+] to see a definition for each of the following terms or acronyms.
COLA: COLA is an abbreviation of the phrase “cost of living adjustment.” COLA is a percent adjustment that acounts for either (a) yearly inflation (the Social Security Administration) or (b) the localization of salaries found in nationwide compensation surveys.
COLI: The cost of living index (COLI) used by ChurchSalary is based on a zip code level survey of the cost of consumer goods and services. It is the only index that uses this local-level measurement methodology. Price surveys are collected by 300 independents researchers and the data is analyzed and published by The Council for Community and Economic Research (C2ER). Learn more about COLI here.
Contract Rent Range: According to the US Census Bureau, “contract rent” reflects the “monthly rent agreed to or contracted for, regardless of any furnishings, utilities, fees, meals, or services that may be included.” This figure includes condo fees paid by tenants. The range represented in the maps above capture the first and third quartiles of contract rent at the county-level (75 percent of rent contracts will be higher than the first quartile and 75 percent will be lower than the third quartile).
Median Gross Rent: According to the US Census Bureau, “median gross rent” reflects the midpoint of local “contract rents plus estimate average monthly cost of utilities (electricity, gas, water, and sewer) and fuels (oil, coal, kerosene, wood, etc.) paid by renters.”
Median Home Values: The National Associate of Realtors map is an adjustment of median home values published in the 2019 American Community Survey at the MSA-level, using the Federal Housing Finance Agency (FHFA)’s quarterly House Price Index (HPI). Mortgage payment estimates are based on a 10% down payment at a 30-year fixed-rate (fully amortized) and do not include insurance or real estate taxes. For true, non-adjusted county-level data, consult the Rent and Home Prices map.
MHI: Median household income, per the US Census Bureau, reflects the income of the householder and all other individuals 15 years old and over in the household, whether they are related to the householder or not. The median captures the point where one-half of the cases fall below and one-half above. For households and families, the median income is based on the distribution of the total number of households and families including those with no income.
Monthly Owner Costs with a Mortgage: According to the US Census Bureau, the median selected monthly owner costs with a mortgage measure the monthly cost of “monthly cost of utilities (electricity, gas, water, and sewer) and fuels (oil, coal, kerosene, wood, etc.) paid by the homeowner.”
Mortgage Payment: According to the US Census Bureau, the median value of owner-occupied housing units reflects the midpoint of “mortgages, deeds of trust, or similar debt; or contracts to purchase.” This measurement encompasses “everything paid to the lender including principal and interest payments, real estate taxes, fire, hazard, and flood insurance payments, and mortgage insurance premiums.”
MSA: Metropolitan statistical areas, as defined by the United States Office of Management and Budget (OMB), reflect “a core area containing a substantial population nucleus, together with adjacent communities having a high degree of economic and social integration with that core.”
PCI: Per capita income, per the US Census Bureau, is “the mean income computed for every man, woman, and child in a particular group including those living in group quarters. It is derived by dividing the aggregate income of a particular group by the total population in that group.”
RPP: Regional Price Parity, published by the US Bureau of Economic Analysis, measures “the differences in price levels across states and metropolitan areas for a given year and are expressed as a percentage of the overall national price level.” It attempts to smooth out regional differences and is based on 75 categories that represent 85 percent of all expenditures. Notably, it models the price of cheaper goods (that a frugal household might be able to find and purchase) and does not weigh home-ownership as heavily at C2ER’s COLI measurement.
Effective Real Estate Tax Rate (RET): The National Association of Homebuilders (NAHB) used Census Bureau data to estimate the RET for 99.5 percent of US counties, including a lowest and highest RET based on census tracts, which reflects the cheapest and most expensive property taxes in your county. To estimate real estate taxes for your county, divide the price/value of a home by 1,000, then multiply by the RET. Together these three RETs can help you calculate a low, middle, and high estimate for real estate taxes in your county.
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