Last week, while having coffee with my neighbor, we started talking about COLA. She mentioned that her federal retirement pension only increased by 2% this year, and I asked why it was different since Social Security went up by 2.8%.

There are many former federal employees around here in the DC area. However, surprisingly few people know the exact formula for FERS COLA.

So, I gathered information from OPM resources and news articles to clarify. If you like numbers, stick around until the end. This is especially important for those approaching retirement.

First, let's look at the actual numbers for 2026. From the third quarter of 2024 to the third quarter of 2025, the CPI-W increase was 2.8%.

As a result, Social Security, CSRS pensions, and military pensions all increased by 2.8% starting with the payments in January 2026.

In contrast, the FERS pension only increased by 2.0% despite the same inflation rate. This means the same cost of living resulted in different increase rates.

The reason is due to the specific formula for FERS. It's commonly referred to as the diet COLA, which is divided into three ranges.

If the CPI-W increase is 2% or less, it increases by that exact amount. In this range, there is no difference from Social Security.

If the increase is over 2% but less than or equal to 3%, it is fixed at 2%. 2026 fell exactly into this range.

If it exceeds 3%, 1 percentage point is deducted from the increase. For example, if inflation is 5%, FERS only increases by 4%.

Let's compare with numbers. If inflation is 2.5%, Social Security increases by 2.5%, while FERS increases by 2%. If inflation is 4%, Social Security increases by 4%, and FERS increases by 3%, widening the gap to 1 percentage point.

In summary, when inflation is low, the increases are the same, but as inflation rises, the disadvantage grows. The key point is that the gap widens in years of high inflation.

The second difference is age. Regular FERS retirees do not receive COLA unless they are 62 years old as of December 1.

There are exceptions. Disability retirees, survivors, and special provision retirees like law enforcement officers or firefighters receive COLA before turning 62.

If someone retires in their 50s according to MRA, it means their pension amount will remain stagnant for several years. Not knowing this can complicate retirement planning.

Moreover, even after turning 62, the diet COLA formula still applies. Just because the age limit is lifted doesn't mean the increase rate will match Social Security.

The third point is the FERS supplement. This supplement, which replaces Social Security until age 62, does not receive any COLA.

COLA only applies to the basic annuity. The larger the proportion of the supplement, the lower the perceived increase rate.

Fourth, the first COLA is calculated like a pro-rated amount. It only reflects the months in which the pension is received after retirement.

For example, if you retire on June 30, it counts from July to November, which is 5 months. If the COLA is 3%, you only receive 1.25%, which is 5/12 of the total.

For reference, CSRS retirees receive the CPI-W increase without any age limits or formula reductions. The rules changed starting with FERS, which most federal employees hired after 1984 belong to.

So, what about 2027? As of mid-September, The Senior Citizens League estimated the Social Security COLA to be 3.5%.

If this estimate is correct, CSRS and Social Security will increase by 3.5%, while FERS will lag by 1 percentage point at 2.5%. Remember, this is just an estimate.

The confirmed numbers will be released by BLS on October 14 when they announce the September CPI. It's calculated based on the average from July to September.

The increase will be reflected in the December pension payments, meaning the actual amount will change starting in January. It's good to know in advance to avoid being surprised by your bank balance.

Honestly, I think this structure is somewhat unfair. Is it really a good design that retirees are most vulnerable when inflation spikes?

I don't believe those who have dedicated their lives to public service should bear the full brunt of inflation. The government needs to be more proactive in addressing these issues.

That said, I've also thought of realistic solutions. Since pensions don't fully keep up with inflation, it's wise to set aside extra funds when planning TSP withdrawals to cover the difference.

Delaying the start of Social Security to increase the proportion of income that fully receives COLA is another option. If retiring before 62, make sure to calculate living expenses for that gap period.

However, the answers can vary greatly depending on retirement timing, pension type, and taxes. It's essential to check with OPM or a financial expert based on your individual situation.

If I were in your shoes, I would run scenarios for 3% and 4% inflation on my pension before retiring. Seeing the numbers can significantly reduce vague anxieties.