2025 COLA Will Be 2.5%
The wait is over for those who may have been wondering about your retirement income in 2025. The Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) rose 2.2% over the last 12 months to an index level of 309.046. For the month, the index increased 0.1%. As explained in more detail below, this means the full COLA for 2025 will be 2.5% for federal annuities and Social Security.
While this is less than the 3.2% rate in 2024, it is close to the historical level. The COLA has averaged about 2.6% over the past 20 years. It went as low as 0.0% in 2010, 2011, and 2016 and as high as 8.7% in 2023.
How is the 2025 COLA Calculated?
The Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) increased 2.59% over the last 12 months. That is a little less than the 3.6% this index increased last year. So, inflation has slowed down but it is still with us. This is a 3.5% increase from the third quarter of 2022. It is an increase of 3.6% over the last 12 months.
This is how the CPI is calculated:
- CPI-W readings are taken from the current year’s third quarter (July – September).
- These data are compared to the average CPI-W reading from the previous year’s third quarter (2023). The average CPI-W for the third quarter of 2023 was 301.236.
- The average reading from the current year’s third quarter (2024) is compared to the figure from the third quarter of 2023.
- The average CPI-W reading went up in 2024. The difference, rounded to the nearest 0.1%, is what beneficiaries will receive as an increase in 2025. (The reasons for the difference between CSRS and FERS is explained below.)
- When the figure is lower— indicating deflation—no adjustment is made to the COLA. That happened several times under the Obama administration. This has not happened under the Biden administration as inflation has been with us each year of his administration.
To receive the full COLA for 2025, a federal retiree’s annuity or a survivor annuity must have started no later than December 31, 2023. If the retirement annuity did not start by this date, the increase is prorated under both CSRS and FERS retirement plans.
Prorated accounts receive one-twelfth of the increase for each month they receive benefits. For example, if the retirement benefit started on November 30, 2024, the prorated COLA would be one-twelfth of the full COLA.
Keep in mind that the annual COLA also impacts Social Security benefits. All federal employees who are enrolled in the FERS system are covered by Social Security. These employees contribute to the program at the current tax rate and are eligible for the same benefits as all other workers covered by the program.
Calculating the COLA for FERS
- For Federal Employees Retirement System (FERS) or FERS Special benefits, if the increase in the CPI is 2% or less, the Cost-of-Living Adjustment (COLA) is equal to the CPI increase.
- If the CPI increase is more than 2% but no more than 3%, the Cost-of-Living Adjustment is 2%.
- If the CPI increase is more than 3%, the adjustment is 1% less than the CPI increase. The new amount is rounded down to the next whole dollar.
- To get the full COLA, a retiree or survivor annuitant must have been in receipt of the payment for a full year.
- If a person has not received the payment for a full year, the increase is prorated under both plans. Prorated accounts receive one-twelfth of the increase for each month they have received benefits. COLAs were first prorated in April 1982.
- Adjustments to benefits for children are never prorated.
- Federal Employees Retirement System (FERS) and FERS Special Cost-of-Living Adjustments are not provided until age 62, except for disability, survivor benefits, and other special provision retirements.
- FERS disability retirees get the adjustment, except when they are receiving a disability annuity based on 60% of their high-3 average salary.
- Also, under FERS, if you have a CSRS component, the component is subject to the CSRS COLA calculation.
This table illustrates how this works:
| If the CPI is: | Then the COLA is: |
|---|---|
| <= 2% | COLA = CPI increase |
| > 2% and <= 3% | COLA = 2% |
| > 3% | COLA = CPI – 1% |
Calculating the COLA for CSRS Employees
For Civil Service Retirement System (CSRS) benefits, the percentage increase is applied to your monthly benefit amount before any deductions are withheld. The payment is rounded down to the next whole dollar.
Of course, there are some exceptions to these calculations. According to the Office of Personnel Management (OPM), “A benefit will not be increased if it would cause the annuitant to receive payments in excess of any cap amount specified by law.”
For those who may be asking how they can determine their COLA for 2025, your answer will depend on several variables, including which retirement system applies to you, how many months you started to receive your retirement payment in the past year, whether the FERS special benefits apply to you, your age, etc.
Statement from NARFE and Why FERS Employees Receive Lower Payments
The National Association of Retired and Federal Employees (NARFE) released the following statement from NARFE President William Shackelford regarding the 2025 COLA.
Even with inflation moderated, cost-of-living adjustments provide a critical boost to the value of federal retirement benefits, ensuring they keep pace with rising prices.
Yet, with inflation above 2 percent, FERS retirees will have their COLAs capped, reducing the real value of their annuities. Inflation impacts these FERS retires the same way as all other retirees, yet they are forced to accept a diet COLA.
The Equal COLA Act, H.R.866/S.3194, would remedy this inequity, providing full COLAs to FERS retirees. NARFE continues to urge all members of Congress to support this bill. FERS retirees deserve full protection to maintain their annuities’ purchasing power throughout retirement.
This COLA also does not account for the sharp increase in the enrollee share of health insurance premiums affecting the federal community, which will rise by an average of 13.5 percent next year for federal annuitants. While such increases may impact the following year’s COLA, they are not yet reflected in the past year’s data.
Why Do Federal Retirees Under FERS Get a Different COLA?
When the CSRS was created, the Social Security System did not exist. The CSRS was created in 1920. The Social Security Act law was enacted on August 14, 1935.
When FERS was created in 1987, federal employees under FERS received benefits that CSRS employees did not receive. As a result, Congress created a system of calculating the COLA in different ways as receiving the full COLA in years when inflation ran higher was not necessary since other benefits were already in place.
What are those benefits?
Under FERS, federal employees get the following:
- Matching funds from the federal government (up to 5%) to invest in their Thrift Savings Plan (TSP) accounts
- Social Security
- Annuity payments in retirement
Also, Social Security and TSP benefits are portable. The benefits accompany the employee if a federal employee leaves a federal job. In other words, FERS allows federal employees to leave a federal job without giving up some of what they have earned.
