As inflation continues to hover around 3%, the latest estimate for the 2025 Social Security Cost of Living Adjustment (COLA) is now up to 3.2%.* It’s interesting to note that the 2024 COLA was also 3.2% adding about $59 to the average retiree’s monthly Social Security benefit. Of course, the final amount of the 2025 COLA may change again before it’s finalized after the release of the September inflation report on October 10th, 2024.
How Cost Of Living Adjustments Are Calculated
The Department of Labor’s Bureau of Labor Statistics (BLS) calculates the COLA by comparing the current year’s third-quarter average Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) to the average CPI-W for the same period in the previous year. That percentage change becomes the amount of the annual COLA for Social Security payments.
However, advocates for retirees point out that the CPI-W is based on expenses paid by those who are still working and likely in better health than retirees. Research shows seniors age 65 and older spend approximately twice as much on healthcare-related expenses than younger people. As a result, critics say COLAs don’t realistically reflect cost of living expenses for the majority of seniors.
How FERS Retirees Lose Out On COLAs
For FERS retirees, COLAs are capped at 2% when consumer prices increase between 2% and 3%. When consumer prices increase by 3% or more, the FERS COLA is reduced by 1%. Though it doesn’t seem fair, this has been the rule since 1986 when FERS was first created. At the time, the reduced COLA was justified because FERS retirees receive income from three sources: their Thrift Savings Plan (TSP), their annuity (pension), plus their Social Security benefit.
“If you retire under FERS at your MRA with a full, unreduced annuity (pension), you’re not eligible for a COLA increase until you turn 62.”
FERS retirees are also subject to a COLA age restriction. If you retire under FERS at your MRA with a full, unreduced annuity (pension), you’re not eligible for a COLA increase until you turn 62. For example, FERS participants born in 1970 or after are eligible to retire at age 57 with 30 or more years of service. However, they will have to wait five years until they turn 62 to receive any COLA at all. And when they do get the COLA it’s calculated at the lower rate. This is why it might be a good idea to work until age 62 instead of retiring at your MRA. In addition to getting the COLA bump, you’ll increase your annuity (pension) with the FERS 10% bonus. To learn more, connect with an FRC® trained advisor.
*https://www.usatoday.com/money/blueprint/retirement/cost-of-living-increase/
