Does Military Retired Pay Increase With COLA?

Military retired pay provides a stable income stream for service members after they conclude their careers. This compensation is a significant aspect of financial planning for retirees. Understanding how this retired pay may change over time is important for long-term financial security. The potential for military retired pay to increase helps maintain its value against economic shifts.

Cost of Living Adjustments Explained

A Cost of Living Adjustment (COLA) helps retired pay maintain its purchasing power. Its primary purpose is to counteract inflation, which can erode the value of a fixed income over time. Without such adjustments, the ability of retired service members to afford goods and services would diminish. COLA ensures the real value of military retired pay is preserved.

COLA is an annual adjustment applied to military retired pay. The Department of Defense states that retired pay is adjusted each year, effective December 1st, based on changes in consumer prices. This annual increase helps ensure retirees can meet their financial obligations despite increasing costs of living.

The adjustment aims to protect military retirees from a decline in their standard of living. It acknowledges that the cost of everyday necessities, from groceries to utilities, tends to increase over time. By adjusting retired pay accordingly, COLA helps bridge the gap between static income and rising expenses.

Determining the Annual COLA Rate

The annual COLA rate for military retired pay is determined by specific economic indicators. The rate is directly tied to the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W), a measure of inflation published by the U.S. Department of Labor’s Bureau of Labor Statistics. This index tracks the average change over time in the prices urban consumers pay for goods and services.

The COLA calculation involves comparing the average CPI-W from the third quarter of the current year to the third quarter of the previous year. If there is an increase in the CPI-W, a COLA equal to that percentage increase is applied. If the CPI-W shows a decrease or no increase, the COLA will be zero, meaning retired pay will remain the same.

The official COLA announcement typically occurs in October, after the third-quarter CPI data becomes available. Once announced, the COLA goes into effect with the December payment, which retirees generally receive in late December or early January. For example, the 2025 COLA was announced in October 2024 and took effect with the December 2024 payment, appearing in January 2025 paychecks.

There is a special consideration for service members in their first year of retirement. If a service member retires between January 1st and September 30th, they may receive a partial COLA in their first year. This partial COLA is calculated differently depending on the individual’s retirement plan.

COLA for Different Retirement Plans

While the COLA rate is determined uniformly based on the CPI-W, its application can vary based on the military retirement system a service member falls under. The retirement system is generally determined by the date of initial entry into military service or an opt-in period. Each system has distinct rules regarding how the annual COLA is applied to retired pay.

The High-3 Retirement System, which applies to those who entered service between September 8, 1980, and December 31, 2017, generally receives the full annual COLA. Under this system, retired pay is calculated based on the average of the highest 36 months of basic pay. Retirees under High-3 receive the full percentage increase determined by the CPI-W.

The REDUX Retirement System, an option for active duty members who entered service between August 1, 1986, and December 31, 2017, features a modified COLA application. Retirees under REDUX typically receive a COLA reduced by one percentage point annually (COLA minus 1%) until they reach age 62. For example, if the full COLA is 2.5%, a REDUX retiree would receive a 1.5% adjustment.

At age 62, their retired pay is recomputed to catch up to what it would have been under the High-3 COLA. After this one-time adjustment, future COLAs revert to the reduced rate (COLA minus 1%).

The Blended Retirement System (BRS), effective January 1, 2018, applies to service members who entered service on or after this date, or those who opted into it from a legacy system. BRS retirees generally receive the full annual COLA, similar to the High-3 system. The BRS combines a reduced defined benefit (pension) with government contributions to a Thrift Savings Plan (TSP). The pension component of BRS receives the full CPI-W adjustment each year.