A pension that never rises loses about a quarter of its buying power over ten years of 3% inflation. Cost-of-living adjustments, or COLAs, are how plans push back. They vary more from plan to plan than almost any other feature, and over a long retirement they can be worth as much as several extra years of service.
The main types
Automatic fixed COLA. A set percentage every year, whatever inflation does. Some apply it to your original pension (simple) and some to your current pension (compound).
Inflation-linked COLA. Tied to the Consumer Price Index, usually with a floor, a cap, or both, and sometimes paid on only part of the pension.
Ad hoc COLA. No automatic increase. Raises happen only when the legislature or the board votes for one.
Partial or none. Some newer tiers have no COLA at all, or a COLA on the share of service earned before a cutoff date.
How major plans compare
| Plan | COLA |
|---|---|
| CalSTRS | 2% of the original benefit each September (simple) |
| CalPERS | Up to 2% a year compounded for most members, limited by inflation |
| Illinois TRS Tier 1 | 3% compounded each year, starting at the later of 61 or the first anniversary of retirement |
| Illinois TRS Tier 2 | The lesser of 3% or half of inflation, simple, starting at 67 |
| NYSTRS | Half of inflation, between 1% and 3%, on the first $18,000 of benefit; 1.7% in September 2026 |
| Florida FRS | 3% a year for service before July 2011, prorated; none for later service |
| Texas TRS | None automatic; the legislature approves increases, most recently in 2023 |
| STRS Ohio | Set by the board each year: 1.6% for July 2026 to June 2027 |
Simple versus compound
Simple and compound COLAs at the same rate look alike at first and drift apart over time. On a $3,000 pension, a 2% simple COLA adds $60 every year, so after 20 years the check is $4,200. A 2% compound COLA adds 2% of the current amount, so after 20 years it is about $4,460. Over a 25-year retirement the compound version pays roughly $40,000 more in total.
Why it matters for decisions
COLAs change the value of almost every retirement choice. A DROP that freezes your pension may also delay COLAs, depending on the plan. A survivor option is worth more if the benefit keeps rising. And comparing a pension with a lump sum or with investing the money yourself only makes sense once you know whether the pension grows.
If your plan relies on ad hoc increases, plan as if raises will be rare. Texas TRS retirees, for example, went from 2013 to 2023 without a general increase. Savings in a 403(b) or 457(b) can fill the gap that inflation opens. See 403(b) vs 457(b) on top of a pension.
Finding your plan’s rule
Your handbook will have a section called “cost-of-living adjustment”, “annual benefit adjustment” or “post-retirement increase”. Check when increases start, whether they are simple or compound, whether there is a cap, and whether they apply to your whole benefit or only part of it.