Cost-of-Living Adjustments May Not Keep Up—Especially With Healthcare and Housing Rising Faster

Missy E
November 14, 2025

Key Takeaways

In 2025, cost-of-living adjustments (COLAs) for public sector retirees are not keeping pace with rapidly rising costs in essential categories like healthcare and housing.
While COLAs offer annual increases, their calculation method does not fully account for the real-world inflation pressures faced by retirees, especially those with fixed incomes.

What COLAs Are Designed to Do

Cost-of-living adjustments are intended to help retirees maintain their purchasing power over time. For government retirees receiving pension benefits

through systems like FERS or CSRS, annual COLAs are meant to reflect changes in consumer prices, typically measured by the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W).

In 2025, the COLA increase for Social Security and many federal pensions is 3.2%, down from the 8.7% surge in 2023 and 3.2% in 2024. However, this number can be misleading. The CPI-W doesn’t capture the cost pressures that retirees actually face—especially those living on fixed pensions with limited supplemental income.

Healthcare Costs Are Rising Faster Than COLAs

Retirees consistently cite healthcare as one of their top expenses in retirement. And in 2025, those costs are rising faster than the COLA can cover:

Medicare Part B premiums rose to $185 per month in 2025, up from $174.70 in 2024.
Part D deductibles increased to $590 in 2025.
FEHB and PSHB premiums also climbed, with the average enrollee facing a 13.5% increase in 2025 alone.
Out-of-pocket caps under Medicare Advantage plans may reach $9,350 for in-network services, excluding non-covered services and additional cost-sharing for supplemental benefits.

These increases often outpace the annual COLA percentage. The result? Your inflation adjustment gets swallowed by medical inflation, leaving little left to support other essential expenses.

Housing Expenses Keep Climbing

Another major pressure point is housing. While many retirees have paid off their mortgages, that doesn’t mean housing costs stop:

Property taxes in many states are rising due to increasing home values and local budget pressures.
Homeowners’ insurance premiums have surged nationwide due to climate-related risks and increased rebuilding costs.
Maintenance and utilities continue to rise, particularly in regions experiencing extreme weather or high energy demand.
Renters are not immune either; national rental prices have remained persistently high, especially in urban areas and retirement-friendly states.

Housing-related expenses in retirement can easily consume over 30% of a retiree’s income, even with a modest COLA. And unlike discretionary spending, these costs are unavoidable.

Why the CPI-W Doesn’t Reflect Retiree Spending

The CPI-W, the current standard for calculating federal COLAs, is based on the spending patterns of urban workers—not retirees. This creates a fundamental mismatch:

CPI-W assigns less weight to healthcare expenses, even though retirees typically spend more than double on healthcare compared to working households.
It places more emphasis on categories like transportation and apparel, which make up a smaller share of retiree budgets.
Housing measurements often lag behind actual market increases, especially for renters.

There have been calls to shift COLA calculations to a more retiree-centric measure like the Consumer Price Index for the Elderly (CPI-E), which would better reflect retirees’ real-world costs. But as of 2025, no such reform has been implemented.

COLA Caps Under FERS Still Apply

If you’re a FERS retiree, you’re subject to a capped COLA system. Even when inflation is high, your COLA may not match the full percentage increase. The FERS COLA rules are:

If inflation is under 2%, you get the full CPI-W increase.
If inflation is between 2% and 3%, you receive a flat 2% COLA.
If inflation exceeds 3%, your COLA is 1% less than the inflation rate.

That means in years like 2023 and 2024, when inflation was running hot, FERS retirees didn’t receive the full COLA boost. And in 2025, even with a 3.2% COLA, the inflation that retirees experience in housing or healthcare may still feel far higher.

Real Income Shrinks When Inflation Outpaces Adjustments

While COLAs are helpful, they’re not always enough to maintain your standard of living. When costs rise faster than your income, you experience real income erosion. This can force difficult financial decisions:

Delaying elective medical procedures due to out-of-pocket costs.
Downsizing your home or moving to lower-cost regions.
Cutting back on travel, leisure, or even basic nutrition.
Drawing more aggressively from TSP or savings, which shortens how long your money lasts.

For public sector retirees who planned their retirement income around predictable expenses, these compounding shortfalls can lead to financial stress that COLAs were originally designed to prevent.

State and Local Benefits May Not Offer Full Protection

Some state and local pension systems don’t offer COLAs at all, or they offer them irregularly, based on plan funding levels or legislative approval. As a result:

Retirees in underfunded state systems may see their purchasing power decline year after year.
States facing budget shortfalls may suspend or reduce COLAs as a cost-saving measure.
Retirees with frozen or capped COLAs may find themselves at a severe disadvantage during high-inflation periods.

In 2025, several states are reviewing their COLA policies in response to inflation and pension system solvency. But until those changes are formalized, many retirees remain exposed.

Supplemental Benefits Can Add to the Burden

In addition to rising premiums and deductibles, some of the supplemental benefits retirees rely on have become more expensive or harder to access:

Dental and vision benefits under FEDVIP may involve increasing copayments or limited provider networks.
Long-term care policies, especially older ones, are seeing sharp premium increases or benefit reductions.
Prescription drug coverage, even under the newly reformed Medicare Part D with a $2,000 out-of-pocket cap, still poses challenges for high-cost drugs before the cap is met.

Because these expenses are often treated as add-ons, they aren’t covered by traditional COLAs—but they directly impact your bottom line.

Strategies to Help Offset COLA Shortfalls

If you’re finding that COLAs aren’t keeping up, there are ways to reduce the pressure:

Review your health plan annually: During Open Season (November to December), compare plans to find one with lower out-of-pocket costs, particularly if you’re Medicare-eligible.
Consider Medicare Part B enrollment if you’re under PSHB. Plans often reduce cost-sharing for enrollees with Medicare, easing your healthcare burden.
Refinance or contest property taxes if your home value has increased dramatically. Many jurisdictions offer relief programs for retirees.
Explore in-state or local assistance programs that help with utility bills, home repairs, or food support. These can stretch your fixed income.
Adjust your TSP withdrawal strategy to protect your long-term assets. Consider working with a licensed agent listed on this website for help aligning your withdrawal plan with inflation expectations.

Legislative Proposals That Could Affect Future COLAs

While no major overhaul has occurred in 2025, there are several proposals under review:

CPI-E for COLA calculations: This proposal would shift COLA calculations to better reflect retiree expenses. If enacted, it could result in higher annual adjustments.
COLA floor guarantees: Some lawmakers have introduced bills to ensure COLAs never fall below a certain baseline, even in low-inflation years.
Reform of state pension COLAs: In response to legal challenges and retiree advocacy, some states are reexamining past freezes or cuts.

These reforms are not yet law, but they reflect growing concern that COLAs alone are no longer doing their job effectively.

Your Retirement Security Demands More Than a COLA

In 2025, public sector retirees face a widening gap between COLA increases and actual expenses. If you’re relying on your pension to carry you through retirement, you can’t assume that COLAs will provide enough cushion, especially in high-cost categories like healthcare and housing. It’s essential to revisit your retirement plan regularly, weigh your benefit options, and stay informed about policy changes that could either improve or further erode your purchasing power.

If you want to explore strategies that protect your income and stretch your retirement resources, speak with a licensed agent listed on this website. They can help you evaluate options tailored to your pension plan, healthcare needs, and long-term goals.