Quick Answer
A cost-of-living raise (COLA) increases your pay to keep up with inflation — it protects your buying power but doesn't get you ahead. A merit raise rewards your performance and is meant to exceed inflation, so it actually improves your financial position. If prices rose 3% and you got a 3% COLA, your real buying power is unchanged; a merit raise above the inflation rate is a true gain. Both are taxed the same — you keep about 65–80% after taxes.
"You got a raise" can mean two very different things. A cost-of-living raise keeps you level with inflation; a merit raise is meant to move you ahead. Knowing which one you're getting tells you whether you actually gained ground.
The difference
Cost-of-living raise (COLA)
Increases pay to match inflation. Usually across-the-board, often tied to the Consumer Price Index. Keeps your buying power steady — you don't fall behind, but you don't get ahead.
Merit raise
Rewards your performance. Based on individual results, given to stronger contributors. Meant to exceed inflation — this is the raise that actually improves your finances.
Why a COLA can feel like no raise at all
If inflation is 3% and you get a 3% cost-of-living raise, your real buying power is essentially unchanged — your bigger paycheck just covers higher prices. Only the portion of a raise above the inflation rate represents a real gain.
So when you hear your raise percentage, compare it to inflation. A 3% raise in a 3% inflation year is flat in real terms; a 5% raise that year is a real ~2% gain. The best outcome is a COLA plus a merit increase on top.
See your raise after taxes
Whichever type you get, it's taxed at your marginal rate — you keep about 65–80%. See exactly what a raise really adds, and check what a good raise looks like. Then run your numbers with the salary increase calculator.