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Cost-of-Living Adjustments

Cost-of-living adjustments (COLAs) in some form are provided on most state and local government pensions. How public pension COLAs are calculated and approved varies considerably.

Approximately three-fourths of pension plans sponsored by states and local governments provide some form of an automatic cost-of-living-adjustment (COLA), i.e., one that does not require specific approval of or action by the plan sponsor (the legislature or city council). Other types of COLAs among plans in the public sector are ad hoc COLAs, which are increases to annuitants’ benefits resulting from specific action by the plan sponsor; and investment-based COLAs, which increase annuitants’ benefits when the pension fund’s investment performance surpasses a designated benchmark.

COLA Basis

The purpose of the COLA is to offset, or reduce, the effects of inflation on an individual's retirement income. 

The Bureau of Labor Statistics measures inflation by calculating the Consumer Price Index for Urban Workers (CPI-U), which measures changes on prices paid by urban consumers on representative goods and services. The chart below plots the most recent inflation data.

20-Year Breakeven Rate, Federal Reserve of St. Louis

New York Federal Reserve Inflation Expectations
 

COLA reforms affecting active or retired plan participants

In the wake of the 2008-09 market decline, many states have altered their COLA provisions for newly-hired workers. Some states altered COLA provisions to also affect retired members, active members, or both. These states include Colorado, Florida, Maine, Maryland, Minnesota, New Jersey, New Mexico, Oregon, and South Dakota. Information about these and other reforms made to public pension plans is available here.

NASRA Resources

Other Resources


Become A Member

Becoming a member of NASRA offers a unique opportunity to join a community committed to the sound, efficient, and innovative stewardship of public retirement systems. Membership connects you with a network of professionals and experts, providing valuable insights into managing public retirement systems with a focus on sustainability and risk-averse strategies.

By joining NASRA, you gain the tools and resources to enhance the management of public retirement systems, ensuring their long-term success and reliability for generations to come.

What's New at NASRA: Government Spending Issue Brief

NASRA’s March 2026 update on government spending makes a basic but important point: public pension benefits are not paid out of a government’s day-to-day operating budget. They are paid from trust funds that employees and employers contribute to during an employee’s working years. Those trusts distribute more than $400 billion each year to retirees and beneficiaries in communities across the country. On a national basis, employer contributions to pension trusts in FY 2023 equaled 5.16 percent of direct general spending by state and local governments, which shows that pension contributions remain a limited share of overall public spending even though the level varies from one state to another. 
The brief also shows that pension costs should be viewed in the context of the changes governments have made over the past 15 years to strengthen plan funding. Following the 2008–09 market decline, nearly every state and many local governments adjusted contributions, benefits, or both to improve pension sustainability. More recent data show that employer contributions increased from FY 2022 to FY 2023, but pension spending as a share of total government spending remained broadly stable. The updated brief provides FY 2023 figures and also projects the aggregate pension spending rate for FY 2024, offering a useful snapshot of both current costs and the longer funding trend.