The number on your pension statement is not what you'll receive in real terms. A $4,000/month pension in 2026 dollars buys $4,000 of goods today. In 20 years at 3% average inflation, that same $4,000 check buys what $2,218 buys today. The check size didn't change. The world around it did.
For pensions with a cost-of-living adjustment (COLA), this erosion is partially or fully offset. For pensions without one -- which covers most private-sector defined benefit plans -- the erosion is complete and permanent. This is one of the most underappreciated risks in retirement income planning, and it compounds silently over the first decade when it's hardest to notice.
What a COLA does
A COLA increases your pension payment each year by a percentage tied to inflation or a fixed rate. Federal pensions (FERS and CSRS) have COLAs tied to the CPI-W, measured in the third quarter of the prior year. Social Security uses the same mechanism. The increases are automatic -- you don't apply for them.
Private sector defined benefit plans generally have no COLA unless explicitly written into the plan document. Check your Summary Plan Description. If it doesn't mention COLA, cost-of-living adjustments, or inflation protection, assume there are none. Some plans offer "ad hoc" increases at the discretion of plan trustees, but these are not guaranteed and not something to rely on for income planning.
The FERS vs. CSRS COLA gap
Even among federal employees, the COLA formulas differ significantly. CSRS retirees receive the full CPI-W increase with no cap. FERS retirees receive a reduced amount: full CPI if it's 2% or below, exactly 2% if CPI is between 2% and 3%, and CPI minus one percentage point if CPI exceeds 3%.
At 3% inflation, the difference is small: CSRS gets 3%, FERS gets 2%. One percentage point per year. But compounded over 25 years, CSRS purchasing power is fully maintained at 100% of the original while FERS purchasing power has eroded to about 78% in real terms. The FERS retiree is living on effectively 78 cents of every dollar they started with.
FERS COLAs also don't begin at retirement. If you retire at 58, your pension receives zero cost-of-living adjustments until you turn 62. Four years of 3% inflation erodes about 11% of your purchasing power before your first COLA arrives. That's a meaningful reduction built into the formula that many federal employees don't discover until they're already retired.
What the numbers actually look like
At 3% annual inflation over 20 years:
- No COLA pension: 100% nominal value, 55% real value (45% purchasing power lost)
- FERS pension (2% COLA at 3% CPI): 149% nominal, 82% real (18% purchasing power lost)
- CSRS/Social Security (full CPI): 181% nominal, 100% real (fully maintained)
The no-COLA retiree isn't getting poorer in terms of their bank account. The check stays the same. But the grocery store, the doctor's office, the property tax bill, the car insurance -- everything around them is getting more expensive by 3% every year. In year 20, they're buying 45% less with the same check.
Why private sector retirees often don't notice
Inflation erosion is slow. In year one, $4,000 becomes $3,880 in real purchasing power -- a $120 reduction that's barely perceptible. In year five it's $3,450. In year ten it's $2,974. In year fifteen it's $2,563. By year twenty it's $2,212. The problem is that people adapt their lifestyle gradually and don't realize how much ground they've lost until they're deep into retirement and it's too late to course-correct.
The retirees who feel this hardest are those with minimal Social Security (which has full CPI protection) or no other inflation-linked income sources. If your entire retirement income is a private-sector pension with no COLA, the purchasing power trajectory is real and worth planning around.
What to do about it
For private-sector retirees with no-COLA pensions, the solutions are mostly about what you build alongside the pension before retirement. Social Security -- especially if delayed to 70 for maximum benefit and maximum inflation protection -- is the most powerful counterweight. A well-funded IRA or 401(k) that grows over the early retirement years provides the flexible spending power to offset what the pension loses in real terms. Delaying retirement a few years to build those supplemental assets often does more for lifetime purchasing power than trying to increase the pension itself.
Use the COLA Sensitivity Calculator on this site to model your specific pension at different inflation assumptions and COLA types. Seeing the year-by-year real value of your pension is the most concrete way to understand what you're working with and what gap, if any, needs to be filled.