Everyone has their favorite moment of realizing the effects of inflation. Just five cents for a bottle of Coke? You’d be lucky to get that back as a bottle deposit today. A dime for a comic book? No amount of superhero time travel will bring that back. Less than a dollar for a gallon of gas? If you’re old enough to remember gas at those prices, then you’re old enough to start planning for retirement. Hopefully, you are able to protect at least a portion of your retirement income against inflation.
For decades, inflation rates in America were relatively low and stable. Between 1999 and 2020, the annual rate of price inflation averaged just 2.1%. As a result, most Americans did not fully feel the day to day effects of inflation, and it was not at the forefront of their minds. In the aftermath of the pandemic, however, inflation surged to higher levels. From 2021 through 2025, the average inflation rate was 4.5%.[1]
Whatever the annual rate may be, the cumulative effect of inflation builds over time. And for retirees who have fixed incomes that do not regularly adjust for cost-of-living changes, even gradual inflation can profoundly erode retirement security.
How a Lack of COLAs Undermines Pension Security
Consider the Texas Teachers Retirement System (TRS), which offers a guaranteed income-style pension benefit to around 2.1 million retirees and active members as of August 2025. Most educators in Texas do not participate in Social Security, and the TRS pension benefit itself has no guaranteed cost-of-living adjustment (COLA) built in. Instead, the legislature has to act to approve a percentage increase in benefits on an ad hoc basis or to authorize the payment of a “13th check,” which is a one-time payment to retirees but does not increase the value of their benefit going forward.
As a result, some retired educators in Texas will see the value of their retirement income steadily erode over time. Inflation rates in the United States between January 1999 and April 2026 mean that a $28,000 pension at the end of the 1990s is worth just under $13,815 today.[2] Put another way, for a teacher who retired in 1999 to have seen the purchasing power of their pension keep up with local inflation, the annual payments today should be roughly $56,750 — 103% higher.
Since the turn of the century, the Texas legislature authorized COLAs just three times (2001, 2013, and 2024).[3] That means a $28,000 pension first issued in 1999 has only grown to about $33,000 today.
The National Overview
According to the National Association of State Retirement Administrators (NASRA), around 75% of public pension plans across the U.S. offer an automatic COLA — that is, a cost-of-living adjustment that does not require a legislature or city council to approve the benefit adjustment.[4] Typically, these automatic COLAs are “pre-funded,” meaning actuaries account for adjustments to benefits after retirement and build the costs of providing those adjustments into the annual normal cost payment that is divided between employers and members.
Other states require a pension board to approve a COLA based on the funded status of the pension plan or inject politics directly into inflation protection by having legislatures approve the payment of COLA or 13th check on an irregular basis.
COLAs and Retirement Security
It is always difficult to forecast the future, but like death and taxes we can expect the value of money to steadily change over time. It is therefore important for any retirement plan to have some degree of inflation protection built in.
Pension Plans
For guaranteed income plans like pensions, this ideally means a built-in COLA that is pre-funded along with the pension benefit itself:
- Plans could issue a COLA annually or every other year,
- Plans could fix the rate or link it to local inflation, and/or
- The benefit could even be adjustable based on investment performance or the funded ratio of the retirement system.
What is important is that the COLA not be issued on an ad-hoc basis, prone to political whims and the need to come up with funding every year to ensure benefits get adjusted.
Guaranteed Return and Defined Contribution Plans
For guaranteed return (GR) plans or defined contribution (DC) plans, built-in protection for inflation can be provided by requiring plans to offer access to convert their account balances into lifetime income:
- Participants could be offered a range of annuities, deferred annuities, guaranteed minimum withdrawal benefits, or other insurance-type products that would provide lifetime income with some periodic inflation adjustment,
- Individual accounts could be enrolled in investment strategies that gradually shift a portion of retirement savings into an inflation-protected asset, like Treasury Inflation-Protected Securities (TIPS) or target-date funds that include a glide path into inflation-protected annuities, and/or
- Retirement systems could offer to roll over a final account balance of a GR or DC plan into a companion pension fund that would provide annual, inflation-adjusted income.
What is important is that GR or DC plans offer participants an easy, low-fee, low-risk way to convert a portion of their retirement savings into inflation-protected income.
COLAs and Pension Reform
One reason why COLAs are not as widely available on a pre-funded basis is that they are expensive. In fact, one way that states and cities have sought to reduce their costs of providing retirement benefits in recent years is to reduce COLA benefits. Between 2009 and 2025, at least 30 states have either lowered the COLA adjustment rate offered to retirees, reduced COLA rates that will be offered to future retirees, or removed access to COLAs altogether for everyone.[5]
For states that are struggling to bring stability and sustainability to their pension funds, a temporary adjustment of COLA benefits as part of a package of other improvements may be a reasonable policy trade-off to preserve the core benefit for the long term. However, COLA adjustments on their own as a way to make a pension plan cheaper also undermine the ability to call that pension plan a retirement plan in the first place.
Policymakers certainly face a host of public policy trade-offs associated with providing retirement benefits, but it is important to understand the role that inflation plays in steadily eroding fixed levels of income and how a lack of best practices with respect to COLAs ultimately undermines retirement security.
For individuals, it may not be necessary that all retirement income is protected from inflation, but ensuring that at least a base amount of income has some inflation protection may be prudent to ensure a secure retirement.
Notes
- Source: Minneapolis Federal Reserve. Technically, there is debate over whether CPI fully captures inflation, given how its methodology captures advanced parts of the economy. Some economists suggest price inflation is much higher than reported, as much as 6% annually in some years during the past decade. Others argue that the cost of goods relative to their quality of service has fallen more dramatically than inflation measures, such as the relative costs of refrigerators or televisions. But no matter CPI’s formal accuracy, there are few credible forecasts of a deflationary future, meaning some form of inflation protection is both prudent and warranted.
- Data calculated using the Bureau of Labor Statistics CPI Inflation Calculator. Note that the average pension benefit paid to individuals who retired in FYE 1999 and had more than 25 years of service was $28,366 (see page 75 of the Teachers Retirement System of Texas Comprehensive Annual Financial Report FYE 1999).
- COLAs issued for Texas TRS members were more complicated than one might assume. In 2001, benefit adjustments for retirees were the combination of a COLA and a retroactive increase to their benefit multiplier for completed service. The combination of both benefit enhancements equates to a 10.77% benefit increase for retirees. In 2013, the COLA was equal to the lesser of 3.0% of a member’s monthly benefit or $100 per month. This means that members who received annual benefits totaling $40,000 or less received a 3.0% increase, while retirees whose annual benefits exceeded $40,000 saw a flat $1,200 increase per year. The 2024 COLA was variable, offering 2.0%, 4.0%, and 6.0% adjustments to members’ benefits based on their retirement date. For more details on the specific breakdown, please see: SB 10 COLA Amounts.
- Source: NASRA
- Source: NASRA and authors’ own review of public plan provisions.
