In 2025, COLA will be 2.5%, but some federal retirees will receive a lower percentage

The final piece of the puzzle came together Thursday morning to calculate the 2025 cost of living adjustment (COLA) for Social Security and federal retirement benefits.

Starting in January, many federal retirees will have a 2.5% COLA added to their Social Security benefits and federal retirement benefits for 2025 — but not everyone will receive the full adjustment.

Federal Employees Retirement System (FERS) retirees typically receive a smaller cost-of-living adjustment on their pensions each year. However, the exact difference depends on what the COLA is in a given year:

• COLA is over 3%: FERS annuity recipients receive 1% less than the full COLA
• COLA is between 2% and 3%: FERS annuity recipients receive a 2% COLA
• COLA is less than 2%: FERS annuity recipients receive the full COLA

For 2025, based on these specifications, FERS retirees will receive a 2025 “diet” COLA of 2% on their retirement benefits beginning in January.

The annual COLA is intended to ensure that the benefits of federal retirees and Social Security recipients keep pace with rising inflation. The Social Security Administration's announcement of the 2025 COLA comes Thursday after the Bureau of Labor Statistics released the Consumer Price Index for Urban Wage Earners and Office Workers (CPI-W) for September – the final number needed to calculate the 2025 COLA. According to the SSA, Social Security retirement benefits will increase in number by about $50 per month next year.

This year, the SSA also updated its COLA notification form, which it sends to beneficiaries in December. The changes are intended to make it easier for pension recipients to find the information most relevant to them.

“The simplified COLA notice is now just one page, uses simple and personalized language, and includes accurate dates and dollar amounts of an individual’s new benefit amount and any deductions,” SSA wrote in a press release.

COLA increases have averaged about 2.6% over the past decade. But especially in the last few years, retirees have seen a wide range in annual COLA percentages. The COLA rose to 8.7% in 2023, marking the largest annual adjustment in more than 40 years. But the COLA for 2024 was much smaller – retirees received a 3.2% adjustment to their retirement benefits earlier this year. Because of the existing caps on these adjustments, FERS retirees received a 7.7% COLA in 2023 and a 2.2% COLA in 2024.

Congress's rationale for providing a “diet” COLA for FERS annuitants was originally to attempt to balance the scales as the government transitioned from the Civil Service Retirement System (CSRS) to the newer FERS program in the 1980s. The idea was to use a reduced FERS pension to better match the overall value of the larger CSRS pension. The FERS pension, along with Social Security and the Thrift Savings Plan (TSP), form the three components of retirement for FERS retirees.

The difference a “diet” COLA makes in just one year may seem relatively small, but federal organizations have said that many consecutive years of smaller COLAs result in a much greater separation over time compared to what one FERS retirees would have received the full COLA amount.

The National Active and Retired Federal Employees Association (NARFE) has predicted that it will take less than five years for FERS retirees' pensions to fall $900 short of what they would have received with a full COLA if the FERS COLA continues its current course. After even longer, the difference could be thousands of dollars.

NARFE National President William Shackelford also expressed concerns about how the 2025 COLA compares to the 2025 health premium increases for the Federal Employees Health Benefits (FEHB) program.

“This COLA also does not take into account the sharp increase in the insured’s share of health insurance premiums impacting the federal community, which will increase by an average of 13.5% next year for federal pension recipients,” Shackelford said in a statement. “While such increases may impact the following year’s COLA, they are not yet reflected in last year’s data.”

In recent years, some lawmakers have called the COLA differences “unfair” and pushed to give FERS pensions the full COLA rather than the reduced amount. The bicameral Equal COLA Act, reintroduced by Rep. Gerry Connolly (D-Va.) and Sen. Alex Padilla (D-Calif.) this Congress, aims to eliminate the current two-tier COLA system for federal retirees .

“The economic conditions that require cost-of-living adjustments impact retirees equally, regardless of whether they receive CSRS or FERS,” Connolly said in a statement. “It is high time we recognized this reality.”

Another option that some lawmakers have considered is to change the overall calculation of the COLA. A current bill, the Fair COLA for Seniors Act, would use the Consumer Price Index for the Elderly (CPI-E) instead of the CPI-W to calculate the COLA each year.

The CPI-E places an emphasis on health care spending in its calculation, focusing on people age 62 and older – the minimum age for those receiving the COLA. Proponents of the bill say the CPI-W does not accurately reflect the spending habits of seniors, who typically spend more on health care.