It’s not unusual for federal retirees to eagerly await news regarding the annual cost-of-living adjustment (COLA). After all, this increase provides retirees with a measure of financial protection against the eroding effects of inflation on their fixed incomes.
But, as most retirees know, the COLA alone is rarely enough to cover the true impact of rising prices. In this article, we’ll discuss the projected 2025 COLA for Civil Service Retirement System (CSRS) and Federal Employee Retirement System (FERS) retirees. We’ll also provide insights on how retirees can bridge the gap between their COLA increase and inflation.
Overview of the Social Security COLA Update
As of July 2024, the Senior Citizens League projects a 2.63% Social Security COLA for 2025, up from the previous month’s prediction of 2.57%. However, this is substantially lower than the 2024 COLA of 3.2% and the 2023 and 2022 COLAs of 8.7% and 5.9%, respectively.
Understanding COLA for Social Security
Each month, the U.S. Bureau of Labor Statistics reports the Consumer Price Index (CPI). The CPI-W measures price changes paid by U.S. consumers for a basket of goods and services.
The Social Security Administration (SSA) uses the CPI-W numbers to make its annual COLA calculation. The SSA compares the average CPI-W for the third quarter (July, August, and September) of the current year to the average CPI-W for the third quarter of the previous year. The SSA determines the COLA using the percentage increase in the average CPI between these two periods.
If there's an increase of more than 0.1%, the SSA approves the COLA increase. When there's no increase in the CPI, or if it decreases, there's no COLA for that year and benefits remain unchanged. If the SSA approves a COLA, recipients will receive an increase starting in January of the following year.
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CSRS and FERS COLA Rules
If you’re a retired Fed receiving a CSRS pension, your COLA is the same as that determined by the SSA for Social Security recipients.
The rules for a FERS COLA, however, are different and are summarized below:
- If the CPI increase is less than 2%, the FERS COLA equals the CPI increase.
- If the CPI increase is between 2.1% and 3%, the FERS COLA is 2%.
- If the CPI increase is more than 3%, the FERS COLA is the CPI increase minus 1%.
Given these rules, if the current projection of a 2.63% increase is accurate, the FERS COLA for 2025 would be 2%.
In this video from our FedLife YouTube channel, Dan Sipe (Founder, Serving Those Who Serve) and Ed Zurndorfer (Federal Benefits Expert) cover everything federal annuitants need to know about annual COLAs for federal pensions and Social Security benefits:
How to Bridge the Gap Between Your COLA Increase and Inflation
One of the main criticisms of COLA is that the CPI measure used for the calculation may not accurately reflect the high inflation experienced by retirees. Some critics argue that the CPI drastically understates certain price increases related to housing, healthcare, and utilities.
The real takeaway here is that while federal retirees do receive COLA increases on their Social Security and government pensions, these increases will likely be insufficient to keep pace with the day-to-day price increases they experience firsthand. This is especially true during high inflationary periods, such as what we’re experiencing now.
For Feds, a key step to bridge this inflation gap is to implement a carefully planned investment strategy in your Thrift Savings Plan (TSP) and other retirement investments. The stock market and equities offer some of the best hedges against inflation. Feds need to have equity exposure to the degree that is reasonable given their risk tolerance and financial goals.
Staying informed with the COLA updates published on Serving Those Who Serve is another important thing you can do for your retirement planning. Or attend one of our complimentary webinars designed to help you make the most of your federal retirement benefits.
Have questions? Feel free to reach out to our team at [email protected].
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The information has been obtained from sources considered reliable but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of Serving Those Who Serve writers and not necessarily those of RJFS or Raymond James. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Investing involves risk and you may incur a profit or loss regardless of strategy suggested. Every investor’s situation is unique and you should consider your investment goals, risk tolerance, and time horizon before making any investment or financial decision. Prior to making an investment decision, please consult with your financial advisor about your individual situation. While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS, we are not qualified to render advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional. **
