A key feature of defined benefit pension plans is that they offer guaranteed income for life. But unless the purchasing power of that income keeps up with inflation, the guarantee doesn’t necessarily ensure financial security.
That is why many public pensions come with cost-of-living adjustments, or COLAs.
Equable Insights
- Average public pension COLA in 2025: 1.77%
- CPI inflation in 2025: 2.7%
- Percentage of public pension plans offering automatic COLAs: ~75%
What Are Public Pension COLAs?
COLAs are periodic adjustments to the value of one’s pension benefits such that they remain steady over time. Ideally, COLA provisions will have adjustment rates that are in line with or above the pension plan’s inflation assumption.
Public pension COLAs vary in how much inflation protection they provide and in who gets the benefit adjustments.
When pension plans pay out COLAs, there are two basic ways plans adjust the underlying benefit: compounding or noncompounding.
Compounding COLAs
A compounding COLA is one in which the base benefit gets permanently adjusted. Any future changes to benefits are added on top.
For example, someone with a $40,000 pension that gets a 2% COLA will have their base benefit increased to $40,800 ($40,000 ✕ 1.02).
The next year, if the level of inflation results in another 2% COLA, then the plan calculates an adjustment based on the new, higher number. In this case, the benefit would increase to $41,616 ($40,800 ✕ 1.02).
Noncompounding COLAs
A noncompounding COLA is one in which all inflation adjustments are based on the original pension benefit value. Each year your plan increases benefits, you get to keep the adjustment from the previous year. But the percentage increase is based on your original pension.
As in the first example above, someone with a $40,000 pension that got a 2% COLA would see $800 added on top for a total pension of $40,800.
The next year, however, they would see another 2% COLA calculated based on the original $40,000 pension. That $800 adjustment would then be added to the total pension of $40,800 from the prior year for a new total of $41,600.
Because it’s based on the original pension amount, the noncompounding COLA results in a slightly lower total benefit amount than the compounding COLA in the first example.
Automatic Versus Ad Hoc COLAs
According to the National Association of State Retirement Administrators (NASRA), around 75% of public pension plans in the U.S. offer automatic COLAs. This figure is confirmed by Equable’s own data. These are often prefunded and built into plans’ normal cost.
On the other hand, plans in some states only grant COLAs if they are approved by the pension board. These “ad hoc” adjustments are not ideal, as they are more likely to be influenced by politics and may be irregular.
Automatic COLAs
There are generally three policy frameworks for those who do have automatically granted COLAs.
- Fixed-rate COLAs: A pre-fixed, specific percentage of benefit increase (or minimum dollar amount).
- COLAs linked to inflation: A percentage increase to benefits based on the national consumer price index (CPI), a local CPI, or the Social Security inflation rate. The actual amount is typically “up to” a maximum rate, such as 2% or 3%.
- COLAs linked to plan performance: A percentage increase to benefits that is dependent on the funded ratio and/or investment performance of the underlying pension plan. The actual amount is also typically “up to” a maximum rate, but the specific provisions around plan performance determine the maximum rate. For example, the maximum COLA rate may be cut in half or suspended if the pension fund is under 80% funded.
Some state pension funds have COLAs linked to both inflation and pension plan performance.
Automatic COLA Policies By State
The map below details how automatic COLA policies for statewide public worker retirement systems are structured across the country. Each color represents a different type of COLA policy, depending on the state paying out pensions.
For more on the landscape of COLAs, read Are Public Pensions Protected From Inflation?
Ad Hoc COLAs
There are a number of state pension plans that do not provide consistent inflation protection. Some of these states have no legal provisions to offer COLAs. Other states only payout COLAs if the legislature authorizes the benefit adjustment.
These are called “ad hoc” COLA benefits because they are discretionary. Whether a COLA is issued or not and even how much the COLA would be are heavily dependent on local politics and legislative budgets.
What is the Average Public Pension COLA?
The average COLA for public worker retirees in 2025 was 1.77%%.[1]
This figure is below most measures of actual price inflation in 2025. For example, the Consumer Price Index (CPI), calculated by the Bureau of Labor Statistics, increased 2.7% from July 2024 to July 2025, a timeframe that aligns with most public retirement systems’ fiscal year end date (CPI inflation was also 2.7% for the full year ending December 2025). That is because many COLA policies do not match inflation. Instead, they have maximum rates or are linked to other factors.
There are some reasonable financial reasons for this, and some years public retirees get COLAs that are actually larger than inflation. However, the net effect in recent years was that public pension COLAs frequently were less than inflation.
Here is a list of U.S. public pension plans and the COLAs they provided in 2025.
Notes
- This is an average of 318 public pension plans, including actual reported percentage rates adjusting benefits starting in the 2025 calendar year and percentage rates based on published COLA policies.
