Every year around this time, we receive comments and questions from our readers about the cost of living adjustment (COLA) and the federal pay raise. Each is determined around the same time of the year, and, assuming there is one or both, they hit federal employees’ or retirees’ paychecks in the upcoming year.
It’s Confusing
The comments we see indicate that some federal employees and retirees do not understand the difference between the two. This is understandable given the complexity of the federal pay and retirement systems.
The purpose of this article is to explain the differences between the COLA and the annual pay raise in an effort to clear up any misconceptions or confusion.
The COLA
The 2025 COLA was recently announced. COLA stands for cost of living adjustment and applies to retired federal employees and Social Security recipients, but not to current federal employees. The 2025 COLA is 2.5%, however, as you will see below, not all federal retirees will receive this amount.
The process for determining the COLA is automatic. It is not subject to politics or the actions of Congress or the president. You will either get one or not based solely on a formula that is put in place by law and determined based on the cost of living as measured by the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W).
How is the 2025 COLA Calculated?
This is a description from the Social Security Administration of how to compute the 2025 annual COLA:
The last year in which a COLA became effective was 2023. Therefore the law requires that we use the average CPI-W for the third quarter of 2023 as the base from which we measure the increase (if any) in the average CPI-W. The base average is 301.236, as shown in the table below.
Also shown in the table below, the average CPI-W for the third quarter of 2024 is 308.729. Because this average exceeds 301.236 by 2.5 percent, the COLA effective for December 2024 is 2.5 percent. The COLA calculation, with the result rounded to the nearest one-tenth of one percent, is:
(308.729 – 301.236) / 301.236 x 100 = 2.5 percent.
This is how the description above looks when broken down in real numbers:
| CPI-W for— | ||
|---|---|---|
| 2023 | 2024 | |
| July | 299.899 | 308.501 |
| August | 301.551 | 308.640 |
| September | 302.257 | 309.046 |
| Third quarter total | 903.707 | 926.187 |
| Average (rounded to the nearest 0.001) | 301.236 | 308.729 |
Which Federal Retirees Get the COLA?
Are you confused yet? I’m afraid it gets even more complex; not all federal retirees receive the same COLA.
For Civil Service Retirement System (CSRS) retirees, the COLA increase percentage is applied to their monthly benefit amount before any deductions and is rounded down to the next whole dollar.
Under the Federal Employees Retirement System (FERS) or for FERS Special benefits, if the increase in the Consumer Price Index (CPI) is 2% or less, the 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.
| If the CPI is: | Then the COLA is: |
|---|---|
| <= 2% | COLA = CPI increase |
| > 2% and <= 3% | COLA = 2% |
| > 3% | COLA = CPI – 1% |
In order to get the full COLA, without regard to whether you are in FERS or CSRS, you must have been receiving annuity payments as a federal retiree for a full year, otherwise, the COLA will be prorated.
Furthermore, FERS and FERS Special Cost-of-Living Adjustments are not provided until age 62, except for disability, survivor benefits, and other special provision retirements.
The Pay Raise
So that’s the COLA, but what about the annual pay raise?
Unlike the COLA, this process IS subject to politics. Who is in office can very much impact whether a pay raise is awarded to the federal workforce.
The annual pay raise is also different from the COLA in that it only applies to current federal employees. Federal retirees are not subject to the annual raise; the increase in their annuity payments is determined by the automatic COLA process as outlined above.
What normally happens is that Congress remains silent on whether to give current federal employees a pay raise for the next year, and the president then sets the amount of the raise, usually in late August. President Biden did that this year when he distributed the alternative pay plan letter outlining proposing a 2% 2025 pay raise for current federal employees.
However, the process does not have to play out that way. Congress can, and sometimes does, pass legislation that authorizes a pay raise different from what the president proposes, but Congress is not legally required to address a pay raise for federal employees in bills that it passes.
As of right now, it looks most likely that the 2% figure proposed by the White House will be the final amount of the 2025 federal pay raise, but it does not become official until the president issues an executive order to finalize it. This usually occurs in mid to late December.
Who Comes Out Ahead?
So who gets more? Do federal retirees get a higher COLA, or do federal employees get a higher raise?
Once again, the two are mutually exclusive because of how they are determined. Consequently, the answer to this question will vary from year to year. Sometimes federal retirees fare better, but in other years, current federal employees will get a higher pay raise.
It looks like they will be pretty much dead even in 2025, especially since the FERS COLA is 2% as explained above. But the important thing to remember is that regardless of which number is higher, the two are two different things determined by two different processes.
