Inflation protection

How Pension COLAs Actually Work

Two retirees with identical starting pensions can be thousands of dollars apart twenty years later, purely because of the cost-of-living provision. It is the least examined line in any pension comparison and often the most consequential.

Why this matters more than it looks

A pension is a promise of money in the future, and the value of future money depends entirely on what it can buy. At 3% inflation, a fixed $50,000 pension has about $37,200 of purchasing power after ten years and roughly $27,700 after twenty. The number on the cheque never changes. What it buys is cut nearly in half.

Anyone retiring at 60 should expect to live on that pension for twenty-five years or more. Over that horizon the inflation provision does more work than a tenth of a percentage point on the multiplier ever will.

Four kinds of COLA

1. Full compounded indexing

The benefit rises each year by the actual change in a price index, and each increase builds on the last. Social Security works this way — its 2026 adjustment was 2.8%, applied to the already-adjusted benefit. This is the gold standard and almost no state pension does it.

2. Simple, non-compounding

The increase is a percentage of your initial benefit, forever. CalSTRS pays 2% simple: on a $50,000 starting pension that is $1,000 every year, indefinitely. It sounds similar to 2% compound and is not.

2% simple vs 2% compound on a $50,000 pension

After 10 years, simple: $60,000
After 10 years, compound: $60,950
After 20 years, simple: $70,000
After 20 years, compound: $74,297
Gap at 20 years: about $4,300 a year

3. Capped at a dollar base

The percentage applies only to the first slice of your benefit. NYSTRS pays 50% of CPI, floored at 1% and capped at 3%, but only on the first $18,000 — so the maximum possible increase is $540 a year. MSERS pays up to 3% of the first $13,000, a maximum of $390.

A capped COLA shrinks as your pension grows

A $390 maximum increase on a $30,000 pension is 1.3%. On a $60,000 pension it is 0.65%. On a $90,000 pension it is 0.43%. The headline says 3%, and the higher your benefit the less of that 3% you actually receive. This is why capped COLAs are often described as protecting low-benefit retirees rather than everyone.

4. Ad hoc, or none at all

TRS Texas and PSERS Pennsylvania pay no automatic increase. Any raise requires the legislature to pass one and fund it. Texas last did so through Senate Bill 10 in 2023, paying 2% to 6% depending on retirement date with the January 2024 annuity. Pennsylvania passed Act 21 in July 2026 granting 15% to 24.5% — but only to members who retired on or before July 1, 2001. Anyone retiring from PSERS today still has no COLA.

What each system actually does

COLA provisions across the eight systems
System	Provision	Guaranteed?
Social Security	Full CPI-W, compounded. 2.8% for 2026	Yes
CalSTRS	2% simple on the initial benefit, plus SBMA restoring purchasing power to 85%	Yes
FERS	Diet COLA: full CPI-W under 2%, flat 2% between 2 and 3%, CPI-W minus 1 point above 3%. Starts at 62	Yes
NYSTRS	50% of CPI, 1% floor and 3% ceiling, first $18,000 only. September 2026 was 1.7%	Yes, but capped at $540
MSERS	Up to 3% of the first $13,000, approved annually. Plus a new Enhanced COLA of $100 to $300 by years retired	No
STRS Ohio	Board-set. 1.0% FY2025, 1.5% FY2026, 1.6% FY2027. 60-month wait for benefits starting after August 2013	No
Florida FRS	3% on service before July 2011, none on service after; mixed service prorated. Special Risk now has a 1.5% minimum	Partially
TRS Texas	None automatic. Legislative only; last granted January 2024	No
PSERS Pennsylvania	None for anyone retiring today	No

The FERS diet COLA, explained

Federal retirees get a deliberately reduced adjustment. The rule has three bands: if CPI-W rises less than 2%, FERS matches it; between 2% and 3%, FERS pays a flat 2%; above 3%, FERS pays CPI-W minus one percentage point.

In low-inflation years the shortfall is small or zero. In high-inflation years it is a full point every year, compounding against the retiree. The December 2025 adjustment illustrates the structure: CSRS retirees received 2.8% and FERS retirees 2.0%, because CPI-W landed in the band where FERS is fixed at 2%.

There is a second catch. FERS COLAs do not begin until you are 62 as of December 1, whatever age you retired. Someone who retires at 57 under MRA-plus-30 spends five years with no inflation adjustment at all. Disability, survivor and special-provision retirees — law enforcement, firefighters, air traffic controllers — are exempt from that wait.

A rough ranking over a long retirement

Best: Social Security, full compounded CPI.
Strong: FERS diet COLA once it starts, and CalSTRS 2% simple with SBMA purchasing power protection.
Limited: NYSTRS and MSERS, real but capped at a few hundred dollars a year.
Uncertain: STRS Ohio, where the board sets the rate annually and has moved it between 1.0% and 1.6% in recent years.
Partial: Florida FRS, where the 3% applies only to pre-2011 service and anyone hired since gets nothing on it.
None: TRS Texas and PSERS Pennsylvania for current members.

What to do about it

If your pension has no COLA or a capped one, the gap has to be filled somewhere else. Three things help, roughly in order of usefulness:

Delay Social Security if you have it. Waiting from 67 to 70 raises the benefit 24%, and that increase is fully indexed for life. It is the cheapest inflation protection available to most people.
Hold growth assets in your 403(b) or 457(b). A fixed pension is effectively a bond. If the guaranteed part of your income does not grow, the invested part probably should.
Budget for the decline rather than being surprised by it. Assume your un-indexed pension buys roughly 25% less after ten years, and plan the later years accordingly.

Frequently asked questions

What is the difference between a simple and a compound COLA?+

A simple COLA applies the percentage to your original benefit every year, so the dollar increase never changes. A compound COLA applies it to the current benefit, so increases grow. On a $50,000 pension, 2% simple reaches $70,000 after twenty years while 2% compound reaches about $74,300.

Which pension systems have no COLA at all?+

Among the eight covered here, TRS Texas and PSERS Pennsylvania pay no automatic adjustment to anyone retiring today. Both have granted occasional legislative increases — Texas in 2023 and Pennsylvania in 2026 — but neither can be planned on, and the Pennsylvania increase reached only members who retired on or before July 1, 2001.

Why is a 3% COLA sometimes worth less than 1%?+

Because of a capped base. Massachusetts pays up to 3%, but only on the first $13,000 of the benefit, so the maximum is $390 a year. On a $60,000 pension that is 0.65%. A genuine 1% on the whole benefit would pay $600.

When do FERS retirees start receiving COLAs?+

At age 62, measured as of December 1 each year, regardless of when they retired. Disability annuitants, survivor annuitants and special-provision retirees such as law enforcement officers, firefighters and air traffic controllers receive them at any age.

Does Social Security have a better COLA than state pensions?+

Generally yes. Social Security applies the full CPI-W increase and compounds it, which none of the eight state and federal pension systems here matches. Its 2026 adjustment was 2.8%.

Sources

Every figure on this page comes from one of the following. Where a plan does not publish a number we needed, the page says so rather than guessing.

CalSTRS — Inflation Protection — 2% simple adjustment and SBMA
NYSTRS — Cost-of-Living Adjustment — formula, caps and recent adjustments
MSRB — COLA Updates — the $13,000 base and annual approval
PSERS — COLA General Information — no automatic adjustment
Ohio Revised Code 3307.67 — STRS Ohio COLA statute and board discretion
OPM CSRS/FERS Handbook Chapter 2 — the diet COLA formula and age-62 rule
SSA — 2026 COLA fact sheet — 2.8% for 2026
TRS Texas — COLA Chart — history of legislative increases

Compare all eight systems

COLA alongside multipliers, vesting and Social Security coverage.

CalSTRS

The only system here with a guaranteed uncapped adjustment plus purchasing power protection.

FERS

How the diet COLA works in practice and when it starts.

Pension vs 401(k)

Inflation is one of the main axes on which the two differ.

Plan data on this page was last checked against the system’s own published material on September 19, 2026. Retirement systems change their rules; if you spot something out of date, tell us.