Federal retirees under the Federal Employees Retirement System receive a smaller annual cost-of-living increase than Social Security recipients whenever inflation runs above 3 percent: the U.S. Office of Personnel Management says the adjustment is then 1 percentage point less than the Consumer Price Index increase. With the wage-earner index up 3.5 percent over the twelve months to August 2026, that reduction is a live question for the January 2027 annuity increase.
The formula is set in the retirement rules OPM administers, and the agency’s FAQ describes no application or election that changes it. What a FERS annuitant can do is understand which tier applies and plan for the smaller figure once the inflation number is published on October 14.
Three tiers separate FERS from the full increase
OPM’s retirement FAQ on how the cost-of-living adjustment is determined sets out three steps for FERS. If the CPI increase is 2 percent or less, the adjustment equals the CPI increase. If it is more than 2 percent but no more than 3 percent, the adjustment is 2 percent. If it is more than 3 percent, the adjustment is 1 percent less than the CPI increase.
Read together, the tiers mean the shortfall is not always a full point. At a CPI increase of 2.5 percent the FERS adjustment is 2 percent, half a point short. At 3 percent it is 2 percent, a point short. Above 3 percent the gap holds at exactly one point, so a hypothetical 3.6 percent increase would produce a 2.6 percent FERS adjustment.
August’s 3.5 percent already sits above the line
The Consumer Price Index for Urban Wage Earners and Clerical Workers rose 3.5 percent over the twelve months to August 2026, reaching an index level of 328.481 (1982-84=100), according to the Bureau of Labor Statistics release of September 11. The measure OPM uses is different. The OPM page describes the change from the third-quarter average of the previous year to the third-quarter average of the current year.
The 2025 third-quarter average was 317.265, a figure Social Security published on its cost-of-living adjustment page. Three percent above that base works out to about 326.78, and August’s 328.481 is already higher. The third-quarter average also takes in July and September, though, so the August level alone does not fix the outcome. The September reading is due at 8:30 a.m. Eastern on October 14, according to the BLS schedule.
The same Social Security page shows what the tiers do in practice. The 2.8 percent adjustment it reports for 2026 sits in the middle tier, and under OPM’s rule as written a CPI increase of that size corresponds to a 2 percent FERS adjustment. That 2.8 percent is the 2026 figure; the 2027 adjustment has not been published.
CSRS annuitants keep the whole increase, and early FERS retirees get none
The haircut applies to the FERS side only. OPM states that the Civil Service Retirement System adjustment is the full CPI increase, and that a retiree with a CSRS component has that component calculated under the CSRS rule. Two retirees who left federal service in different decades can therefore see different percentages from the same inflation reading.
A separate limit applies to age. According to OPM, FERS adjustments are not provided until age 62, except for disability, survivor benefits and other special provision retirements. For a FERS retiree under 62 outside those categories, the tier question therefore comes after the age question.
What the formula leaves to the annuitant
Because the reduction follows a fixed formula, it is not decided case by case, and the FAQ describes no waiver or review for it. The practical response is a spending and withdrawal choice: with the annuity rising by less than prices, the gap has to come from Social Security, savings or lower expenses.
That choice is easiest to size after October 14, when the percentage is public and the 2027 annuity increase can be read off OPM’s tiers. For a FERS retiree who also draws Social Security, the two increases will differ, since Social Security applies the full COLA percentage while FERS applies the tier. OPM’s FAQ remains the controlling statement of the rule, and its text sets the line at 3 percent with a deduction of 1 percent above it.
Planning withdrawals around an annuity that rises more slowly
The Retirement Tax & Withdrawal Planner is a 12-page planner for retirees who draw income from several sources at once, such as a pension or annuity, Social Security and savings accounts, and who need to decide which account to tap first. It addresses the problem of paying for rising costs when one income stream grows more slowly than the others.
The planner includes four calculators covering provisional income, IRMAA tier, the RMD schedule and Roth bracket fill, along with the account withdrawal order, so a household can work out the sequence of draws.
Work out which account to draw from first →
This article was drafted with AI assistance from the cited official sources and checked against them before publication.
David M. Keller is a finance writer based in Columbus, Ohio, covering personal finance and consumer-focused economic topics. He earned his degree in journalism from Ohio University and began his career reporting on local business and economic trends for a regional media outlet. Since then, he has contributed to a variety of online publications, focusing on clear, practical coverage of topics such as cost of living, debt, and everyday financial decision-making.
