Regardless of the adjustments in store, understanding the calculation processes for both COLAs and pay raises is crucial for making informed financial decisions and planning for the future. Image: Andrii Yalanskyi/Shutterstock.com
By: Dallen HawsAs we enter 2025, both federal retirees and active employees are anticipating potential changes to their income through Cost of Living Adjustments (COLA) and pay raises. While both types of adjustments aim to help individuals keep pace with inflation, they differ significantly in how they are calculated and applied.
FERS COLAs: What to Expect in 2025
For federal retirees under the Federal Employees Retirement System (FERS), the COLA is an important adjustment made annually to ensure that their pensions maintain their purchasing power amid rising costs. The FERS COLA is calculated based on the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W), which tracks the average price changes of goods and services purchased by consumers. However, unlike pay raises for active employees, FERS COLAs are determined automatically and do not require legislative action.
The COLA for 2025 will be based on inflation observed throughout 2024. Inflation was around 2.7% for the year of 2024. With that in mind, the COLA for this year is 2%. Check out this next section to see how we get that number:
How Are FERS COLAs Calculated?
FERS pension COLAs are designed to reflect inflation but have a built-in mechanism that may limit the increase if inflation is high. Specifically:
● If inflation is between 0% and 2%, the FERS COLA will match inflation exactly.
● If inflation is between 2% and 3%, the COLA will be capped at 2%.
● If inflation exceeds 3%, FERS retirees will only see a COLA increase that is 1% less than the actual inflation rate. For instance, if inflation rises by 5%, the COLA for FERS would be capped at 4%.
This “diet” COLA system is a key distinction between FERS and other federal pension systems like the Civil Service Retirement System (CSRS), which provides the full COLA, even when inflation exceeds 3%.
Eligibility for FERS COLAs
Not every FERS retiree is eligible for a COLA immediately upon retirement. Federal employees who retire under the traditional FERS system will only begin receiving COLAs once they reach 62. However, those who retire after the age of 62 can begin receiving COLAs right away. Special provisions apply to certain categories of federal employees, allowing some retirees to access COLAs sooner.
If a retiree leaves service mid-year, the COLA is prorated based on the length of time they have been retired during the year. For example, if a federal employee retires in the middle of the year, they would receive half of the COLA increase, assuming they were retired for half the year.
Federal Pay Raises in 2025
In contrast to FERS COLAs, pay raises for active federal employees are not automatically determined by inflation. These raises are decided through the political process and require approval from Congress. Each year, the President proposes a pay raise for federal employees, which is then reviewed and potentially modified by Congress before being signed into law.
For the year of 2025, there will be a federal pay raise of 2%. Therefore, the 2025 COLA and pay raise are both at 2% for the year of 2025.
Challenges to FERS COLAs
One key challenge for federal retirees under the FERS system is that their COLAs often do not keep pace with inflation over time. As the years go on, the limitations on COLAs—particularly the cap of 2% when inflation is between 2% and 3%, and the 1% reduction when inflation exceeds 3%—may mean that FERS pensioners experience a decrease in their purchasing power. It is important to have other forms of retirement savings and investments to help maintain a stable standard of living.
Retirees who receive CSRS pensions or Social Security, on the other hand, are not subject to these COLA caps and receive the full benefit of inflation adjustments.
Looking Ahead: 2025 and Beyond
As we continue through 2025, much will depend on inflation trends and how they impact both COLAs for retirees and pay raises for active federal employees. While FERS COLAs are automatically adjusted based on inflation, active federal employees can anticipate a more political process for their pay raises. Regardless of the adjustments in store, understanding the calculation processes for both COLAs and pay raises is crucial for making informed financial decisions and planning for the future.
Dallen Haws is a Financial Advisor who is dedicated to helping federal employees live their best life and plan an incredible retirement. He hosts a podcast and YouTube channel all about federal benefits and retirement. You can learn more about him at Haws Federal Advisors.
More Than a Third of Those Eligible under GPO-WEP Repeal Getting Back Payments, Says SSA
Retention Standing, ‘Bump and Retreat’ and More: Report Outlines RIF Process
House Budget Plan May Put Federal Employee Benefits on Table for Cuts
Budget Options Document Targets Retirement, Health Insurance, Other Benefits
Deferred and Postponed Annuities Under CSRS and FERS
Get Your Official Personnel Folder in Order to Max Out Benefits
