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COLA Is Supposed to Protect Retirees—But the Math Doesn’t Always Work in Your Favor

Missy E
November 14, 2025

Key Takeaways

The annual COLA (Cost-of-Living Adjustment) is meant to preserve your purchasing power in retirement, but it often lags behind actual inflation in crucial categories like healthcare and housing.
As a government retiree, understanding the COLA formula and the limits of its protection is vital for making smarter long-term financial decisions.

What COLA Really Does—and What It Doesn’t

Each year, COLA is applied to Social Security benefits and many public pension systems to help retirees keep up with inflation. But the increase is based on the Consumer Price Index

for Urban Wage Earners and Clerical Workers (CPI-W), which may not reflect the real inflation you experience as a retiree.

The CPI-W measures spending patterns of working households—not retirees. This alone creates a mismatch between your cost of living and how COLA is calculated.

The Formula That Sets the Stage

COLA is based on the third-quarter CPI-W data (July, August, and September) compared to the same quarter of the previous year. If there is an increase, that percentage becomes the COLA for the upcoming year, taking effect in January.

For example:

In 2025, the COLA increase is 2.5%, based on 2024 data.
This increase is applied to retirement benefits starting January 2025.

However, this backward-looking calculation means COLA doesn’t account for inflation that occurs in the last quarter of the year or sudden economic shifts that arise afterward.

Inflation Isn’t Even Across Spending Categories

Your retirement spending habits are likely very different from those of working households. While CPI-W weighs categories like transportation and apparel more heavily, retirees often spend more on:

Healthcare – Premiums, copays, and out-of-pocket expenses rise faster than general inflation.
Housing – Even if you’ve paid off your mortgage, property taxes, insurance, utilities, and maintenance climb steadily.
Food – Grocery prices have become volatile in recent years, hitting fixed-income retirees harder.

Because these categories rise faster than the overall CPI-W, your COLA may not fully compensate for your actual cost increases.

A Look at Historical COLA Performance

Over the past decade, COLA increases have ranged widely:

2016: 0.0%
2017: 0.3%
2018: 2.0%
2022: 5.9%
2023: 8.7%
2024: 3.2%
2025: 2.5%

While the 2023 increase was one of the largest in decades, it followed an unprecedented inflation spike in 2022. In most years, COLAs have not kept pace with the rising cost of key retirement necessities.

How COLA Works in Public Sector Retirement Systems

Many government employees receive retirement benefits through systems like FERS (Federal Employees Retirement System), CSRS (Civil Service Retirement System), or various state-run pension plans. COLA treatment can vary depending on which system you’re in:

FERS retirees get COLA starting at age 62 (unless you’re a special category employee like law enforcement).
FERS COLA is often capped—if inflation is 2% or less, you get the full increase. If it’s between 2% and 3%, you get 2%. If it’s over 3%, you get CPI-W minus 1%.
CSRS retirees typically receive full COLA regardless of age.
State pension COLAs may be fixed, variable, or subject to funding availability or legislative approval.

So even when CPI-W reflects higher inflation, your benefit may not receive the full adjustment.

Medicare Part B Premiums Can Eat into COLA

Each year, Medicare Part B premiums are adjusted—often upward. For 2025, the standard Part B premium is $185 per month, an increase from 2024. If your Social Security benefit increases by $59 per month, and your Medicare premium goes up by $10 or more, a significant chunk of your COLA disappears before you even see it.

This is known as the “net COLA”—the increase you actually feel after accounting for Medicare deductions. For many retirees, net COLA is far lower than the headline increase.

How State Taxation and Health Costs Undermine Your Benefit

Even if your gross retirement benefit increases, you may not feel better off due to:

State income taxes – Some states tax government pensions; others don’t. The impact on your net COLA can be significant.
Health insurance premium increases – If you are under FEHB or a state plan, premiums and cost-sharing often rise faster than the COLA can cover.
Long-term care expenses – These grow rapidly and are rarely accounted for in general inflation indexes.

As a result, your increased benefit can be quickly consumed by non-discretionary expenses.

Housing Trends Make It Harder to Keep Up

Housing is one of the most underappreciated inflation categories for retirees:

Property taxes can rise annually, especially in areas with reassessment.
Homeowners insurance premiums are climbing due to climate-related risks.
HOA fees and maintenance costs trend higher every year.

Even renters aren’t immune—rental inflation has outpaced COLA adjustments in many urban areas. These housing-related pressures can significantly outpace your benefit increases.

The Hidden Risks of Delaying Retirement

If you’re still working and thinking of retiring soon, it’s essential to understand how COLA will (or won’t) work for you once you stop receiving a regular paycheck:

You don’t get a COLA on deferred retirement benefits until you officially begin collecting.
If you retire under FERS before age 62 (not as a special category employee), you won’t receive COLA until you reach that age.

Delaying retirement without planning for these COLA gaps can result in years of diminished buying power.

What You Can Do to Mitigate COLA Shortfalls

While you can’t change how COLA is calculated, you can take steps to soften its impact:

Budget for higher inflation in healthcare and housing rather than assuming a flat COLA increase will suffice.
Coordinate with Medicare and FEHB to optimize cost-sharing, especially at age 65.
Diversify your income sources so you’re not entirely dependent on a COLA-adjusted benefit.
Review your tax situation to minimize how much of your COLA is consumed by state or federal taxes.
Track open enrollment periods annually and assess whether more cost-effective health options exist.

Staying proactive with your finances is the best defense against the shortcomings of COLA.

Advocacy Matters: Pushing for CPI-E

There’s growing discussion about switching COLA calculations from CPI-W to CPI-E (Consumer Price Index for the Elderly), which gives greater weight to medical care and housing—categories that matter more to retirees.

While CPI-E is still experimental and not officially adopted, it has been proposed in federal legislation multiple times. If adopted, it could result in higher COLA increases for retirees over time.

Supporting efforts to make this change could be in your best interest, especially if you’re concerned about long-term erosion of your purchasing power.

Why You Need to Pay Attention Every Year

COLA announcements may seem routine, but they’re a key financial indicator for your retirement planning. Each fall, when the next year’s COLA is announced, review your expected benefits and adjust your budget:

Will your Medicare premium increase offset your COLA?
Do your housing or healthcare costs exceed your benefit increase?
Should you consider changes during Open Season?

Small adjustments made annually can help protect your financial stability over the long term.

Planning for Uncertain Times

In periods of economic volatility, inflation spikes and COLA lags can create real hardship for retirees. As we move through 2025, with healthcare costs projected to continue climbing and housing remaining unstable in many regions, your retirement security depends on more than just a percentage increase each January.

Planning around COLA shortfalls is not a luxury—it’s a necessity.

Protect Your Retirement from the Limits of COLA

While COLA provides an important baseline, it’s not enough on its own to guarantee financial stability throughout retirement. The gap between real-life expenses and benefit increases can grow over time unless you make proactive adjustments.

Speak with a licensed agent listed on this website for help evaluating your benefit projections, coordinating with Medicare, and exploring options that can give you more financial breathing room each year.