Key Takeaways
-
Cost-of-living adjustments (COLAs) are designed to preserve the purchasing power of your retirement income, but in 2025, they continue to lag behind the true inflation retirees face—especially in healthcare and housing.
-
Relying solely on COLAs without adjusting your broader retirement strategy could leave you with less real income year after year.
What COLAs Are Supposed to Do
Cost-of-living adjustments (COLAs) are annual increases to retirement benefits intended to keep pace with inflation. For government retirees, COLAs apply to Social Security benefits and in many cases, to pension income under CSRS and FERS.
- Also Read: The Postal Benefits You Grew Up With Are Changing—Here’s What 2025 Actually Looks Like
- Also Read: Medicare Isn’t Free—And Here’s What Happens When You Try to Avoid It Too Long
- Also Read: Retiring as a Law Enforcement Officer? You’ve Got Benefits Most Feds Can Only Dream About
-
If CPI-W increases by 2% or less, FERS COLA matches it.
-
If CPI-W increases between 2% and 3%, FERS COLA is capped at 2%.
-
If CPI-W increases by more than 3%, FERS COLA is CPI-W minus 1%.
This formula automatically reduces the actual increase FERS retirees receive in high-inflation years, which can erode real purchasing power.
Inflation in Retirement Is Not Uniform
The inflation rate you experience in retirement often looks nothing like the national average. The CPI-W reflects prices paid by working-age individuals in urban areas—not by retirees. It underweights the expenses that hit you hardest.
Common areas where retiree inflation is much higher than general inflation include:
-
Healthcare: Premiums, out-of-pocket costs, and prescription drugs typically increase faster than overall CPI.
-
Long-term care: Services like nursing home or assisted living care can see double-digit annual increases.
-
Housing: Rising property taxes, home insurance, and rent increase faster in retirement-heavy areas.
-
Food and energy: Essentials like groceries and utilities often rise faster than your COLA can keep up with.
In 2025, although the official COLA increase is 3.2%, your real-world expenses—especially healthcare—may have increased by 5% or more.
How COLAs Work Under Federal Retirement Systems
Your retirement system affects whether and how COLAs apply:
-
CSRS retirees receive full COLAs based on CPI-W.
-
FERS retirees are subject to the capped formula mentioned earlier.
-
FERS employees who retire under MRA+10 rules may not receive COLAs until age 62.
This disparity hits FERS retirees especially hard. Even a modest 1% reduction in COLA over 10 years can lead to significantly lower cumulative retirement income.
The Long-Term Impact of COLA Lag
COLAs that don’t keep up with actual costs result in a slow erosion of your purchasing power. If your monthly benefit increases by 3%, but your real expenses increase by 5%, you effectively lose money each year.
Let’s say you retire with a $2,500 monthly annuity under FERS. If your average annual COLA is 2% but your actual inflation rate is 4%, here’s what happens over 15 years:
-
Your annuity grows to about $3,360/month.
-
But your expenses, starting at $2,500, grow to about $4,500/month.
The gap between income and expenses widens, and without additional income sources, savings must be tapped faster than planned.
Why the CPI-W Doesn’t Serve Retirees Well
The CPI-W was never designed for retirees. It tracks expenses of urban workers, not older adults. It places lower emphasis on medical costs, which can be a major part of a retiree’s budget.
There have been proposals to use the Consumer Price Index for the Elderly (CPI-E), which weights healthcare and housing more heavily. If CPI-E were used, COLAs might better reflect your actual cost increases. But as of 2025, the CPI-E is still not the standard.
This structural flaw in COLA calculation continues to disadvantage retirees, particularly as healthcare inflation outpaces nearly every other expense category.
Social Security COLAs vs Pension COLAs
While Social Security and pensions both apply COLAs, the mechanisms—and the benefits—differ.
-
Social Security uses the full CPI-W, and increases are applied in January each year.
-
CSRS pensions also use the full CPI-W, applied annually.
-
FERS pensions use a reduced COLA if inflation is above 2%.
This means FERS retirees not only start with lower pensions than CSRS retirees, but they also get smaller adjustments over time.
The result: Your future buying power diminishes faster under FERS, unless you actively supplement your income.
What You Can Do to Offset COLA Limitations
Relying solely on automatic COLAs is not a complete retirement strategy. You may need to take the following actions to counteract the shortfall:
Diversify Retirement Income Streams
You might already have income from Social Security and your pension. But additional income can make a difference:
-
Thrift Savings Plan (TSP) withdrawals can help cover increasing costs.
-
Part-time work or consulting in early retirement can delay withdrawals and preserve capital.
-
Rental income or other passive streams can hedge against inflation better than fixed annuities alone.
Delay Claiming Social Security
If you’re eligible, delaying Social Security until age 70 can increase your benefit by about 8% annually after full retirement age. This not only boosts your base benefit but increases future COLA amounts because the higher base grows with each adjustment.
Reassess Your Spending Plan Annually
Costs fluctuate, and your retirement strategy should adapt:
-
Adjust your withdrawal rates from TSP or IRAs based on inflationary pressures.
-
Rebudget major expense categories like healthcare, transportation, and travel.
-
Set aside more for healthcare every year, especially as you reach your mid-70s.
Reevaluate Healthcare Coverage
Since healthcare costs tend to rise faster than COLAs, this category requires focused planning:
-
Coordinate your Federal Employees Health Benefits (FEHB) plan with Medicare Parts A and B to reduce out-of-pocket expenses.
-
Consider setting aside a Health Savings Account (HSA) before retirement if you’re eligible.
-
Use flexible spending tools, like FSAs, to manage tax-advantaged out-of-pocket spending before retirement.
The TSP’s Role in Keeping Up with Inflation
Unlike your pension or Social Security, the TSP offers growth potential that can outpace inflation—if managed properly. Consider the following:
-
Choose investment funds with inflation-protected strategies. The G Fund offers safety, but it may not outpace inflation. C, S, or I Funds may provide better long-term growth.
-
Rebalance annually. Avoid being too conservative for too long—especially early in retirement.
-
Monitor required minimum distributions (RMDs). Starting at age 73, you’ll be required to withdraw from your TSP and IRAs. Manage this strategically to avoid tax inefficiencies while sustaining income.
COLAs Won’t Get Reformed Any Time Soon
While legislation has been introduced in past years to shift COLA calculations to the CPI-E, no such law has passed. In 2025, you’re still dealing with a system that doesn’t reflect your reality.
The political hurdles are significant:
-
Switching to CPI-E would increase federal outlays significantly.
-
Budget hawks often oppose anything that raises long-term spending.
Until a change is made, you’ll need to assume your COLAs will underperform actual inflation—especially as you age.
Retirees Must Plan Around Inflation—Not With It
Understanding how your COLA works is only the first step. Knowing that it likely won’t keep up with your real expenses should be the motivation to build a more inflation-resilient retirement strategy.
-
Track your personal inflation rate, not the national average.
-
Prioritize flexible income sources that grow over time.
-
Take a proactive role in planning your spending, investments, and healthcare costs.
Don’t let the annual COLA lull you into thinking your income is secure—it’s your planning that provides true security.
Stay Prepared for Rising Costs in Retirement
If you’re relying on government retirement benefits, it’s critical to understand that COLAs alone aren’t enough to protect your purchasing power in the long run. Inflation hits retirees differently, and without adjustments, you risk outliving your income.
Get in touch with a licensed agent on this website to review your income streams, healthcare options, and long-term financial plan. An informed strategy can make all the difference.
