Why would my pension increase? A guide to unexpected adjustments

According to the Bureau of Labor Statistics, various economic factors and fund performance are considered when granting post-retirement pension increases. A pension increase might seem like a welcome surprise, but understanding the underlying reasons is crucial for sound financial planning and healthy aging.

Quick Summary

Several factors, including cost-of-living adjustments, strong investment performance by the pension fund, legislative changes, or 'ad hoc' increases, can cause your pension to increase. Understanding the specific reason is key to assessing the future stability and trajectory of your retirement income.

Key Points

• COLA is a key reason: Many public sector pensions include a Cost-of-Living Adjustment (COLA) that automatically increases benefits to combat inflation, based on an index like the Consumer Price Index (CPI).

• Investment performance matters: A pension fund's strong investment returns can enable administrators to provide special, non-guaranteed increases, often called 'ad hoc' increases, to retirees.

• Legislation can mandate increases: New laws or policy changes, especially affecting government or public pensions, can lead to mandated benefit increases, such as recent adjustments to Social Security for some retirees.

• Delaying benefits can boost your payout: Postponing your retirement and delaying the start of benefits, particularly with Social Security, results in earning delayed retirement credits that permanently increase your payments.

• Review your plan documents: To understand your pension's specific rules, such as eligibility for COLAs or other increases, you must review your plan documents, as rules vary significantly by employer and plan type.

Understanding the Drivers Behind a Pension Increase

For retirees, a pension is a cornerstone of financial security. Any change to this steady income stream, especially an increase, can be surprising. The reasons behind a pension increase are not random; they are typically tied to a few key areas determined by the plan's rules and broader economic conditions. These factors can vary significantly based on whether the pension is from a government agency or a private employer, and whether the plan is a defined benefit or defined contribution plan.

Automatic Cost-of-Living Adjustments (COLAs)

A Cost-of-Living Adjustment (COLA) is a mechanism designed to protect retirement income from the eroding effects of inflation. For many government and some private pensions, this is a permanent, annual feature that automatically adjusts the benefit amount. These adjustments are typically tied to a specific inflation index, such as the Consumer Price Index (CPI), which tracks the average change in prices paid by urban consumers for a basket of consumer goods and services.

• How it works: The annual COLA percentage is determined by comparing the inflation rate from the preceding year. If the CPI shows an increase, the pension benefit is adjusted upwards by a set percentage. For example, a state pension plan might be legally required to provide a COLA that is 50% of the previous year's inflation rate, with a minimum and maximum cap.
• Who is covered: COLAs are common in public sector pensions, including many state employee retirement systems and Social Security. Private sector pensions may or may not include a COLA provision, and if they do, the terms can vary widely. It is important to review your specific plan documents to understand if and how your pension is inflation-adjusted.

The Impact of Investment Performance

A pension plan's financial health is heavily dependent on the performance of its underlying investments. When the pension fund's investments—which can include stocks, bonds, and other assets—perform well, it can provide the financial latitude for the plan administrators to increase benefits.

• Ad hoc increases: For many private pensions, especially older plans, any increase in benefits is not automatic. Instead, the pension plan's administrators may consider granting an "ad hoc" or special, non-guaranteed increase based on strong investment returns and the overall financial position of the fund. These are not guaranteed and are decided on a case-by-case basis by the fund's trustees.
• Income Drawdown: For retirees with defined contribution plans using an income drawdown strategy, strong investment performance directly impacts their retirement income. As the invested fund grows, the amount that can be drawn as income can increase as well, though it comes with the inherent risk that investments can also lose value.

Legislative Changes and Plan Amendments

Sometimes, a pension increase is the direct result of a new law or a change to the pension plan's rules. This is particularly relevant for public sector pensions where state legislatures can pass new laws affecting retired employees.

• Social Security Fairness Act: Recent legislation, such as the Social Security Fairness Act in the US, has impacted certain public employees whose pensions were reduced by the Windfall Elimination Provision (WEP) or Government Pension Offset (GPO). As of 2025, affected retirees began receiving adjusted, and in many cases increased, benefits.
• Retroactive Pay: In some rare cases, a collective bargaining agreement or contract settlement can result in a retroactive pay increase for former employees. If a pension calculation is based on past earnings, this retroactive pay could trigger an adjustment and a corresponding increase in your pension.
• Plan Conversions: While less common, an employer converting or amending a plan might lead to a benefit increase, though strict "anti-cutback rules" protect existing benefits.

Late Retirement Credits

For some pension plans, and most notably with Social Security benefits, delaying the start of your retirement can lead to a larger monthly payout. This is because delaying benefits allows for delayed retirement credits to accumulate.

• Social Security Delay: With Social Security, you earn an 8% increase for each year you delay receiving benefits after your full retirement age, up until age 70. This is a significant factor in increasing one's retirement income.
• Plan-Specific Rules: Some private or government plans may also offer similar incentives or a higher accrual rate for those who work past their normal retirement age, leading to a higher initial pension benefit.

Comparison of Pension Increase Scenarios

Factor	Common for...	Reason for Increase	Is it Guaranteed?	Primary Driver
Cost-of-Living Adjustment (COLA)	Public sector pensions (e.g., state, federal employees)	Matches inflation (based on CPI) to preserve purchasing power.	Usually, if inflation criteria are met, but may have caps.	Inflation
Investment Performance	Private sector defined benefit (and some public) plans; defined contribution drawdown.	Strong investment returns enable the fund to provide discretionary or 'ad hoc' increases.	No, increases are not guaranteed and depend on financial health.	Market Performance
Legislative or Plan Changes	Public sector pensions (state/federal); private plan amendments.	New laws (e.g., Social Security reform) or changes to the plan's rules.	No, depends on specific legislation or company decisions.	Legal/Regulatory
Delayed Retirement	Social Security; some pension plans.	Earning credits by delaying the start of benefits past normal retirement age.	Yes, it is a built-in feature of many plans and Social Security.	Your Personal Decision

Conclusion: Navigating Your Financial Future

Receiving a pension increase is undoubtedly a positive development, but it should prompt a closer look at your financial situation. Understanding the reason behind the increase allows you to assess its long-term reliability. Is it a dependable annual COLA, or a one-time bonus based on a good market year? For those on a fixed income, even a small increase can make a significant difference in maintaining a comfortable quality of life as they age. By staying informed about your specific plan's details and the broader economic trends, you can make smarter financial decisions for a secure and healthy retirement.

For more information on specific pension regulations in the United States, you can refer to the official IRS website on retirement topics.

IRS retirement plans

Frequently Asked Questions

What is a Cost-of-Living Adjustment (COLA) and how does it relate to my pension?

A COLA is an increase to your pension designed to help offset the impact of inflation and maintain your purchasing power. It is often an annual, permanent increase, though the percentage is usually tied to a specific inflation index, like the Consumer Price Index (CPI).

Can my pension increase because of market performance?

Yes, but this is not guaranteed. For defined benefit plans, strong investment returns by the pension fund can allow administrators to grant discretionary or 'ad hoc' increases. For defined contribution plans, your income can increase if your invested funds perform well.

Are private and public pensions adjusted for inflation in the same way?

No. Public sector pensions (state, federal) are more likely to have legally mandated COLA provisions. Private sector pensions may or may not offer COLAs, and any increases are often discretionary and based on the fund's financial health.

What role do legislative changes play in a pension increase?

New legislation can directly impact pension benefits. For example, recent laws have affected how Social Security benefits are calculated for certain public employees, resulting in increases for those previously impacted by WEP and GPO.

How does delaying retirement affect my pension?

For some pension plans and Social Security, delaying the start of your retirement benefits can lead to higher monthly payments. With Social Security, you earn credits that increase your benefit for each year you delay receiving it after your full retirement age.

If my pension increases, does that mean my pension was underfunded before?

Not necessarily. An increase typically reflects the plan's rules and current economic conditions, not necessarily a prior underpayment. An increase can be due to a strong market year, a COLA, or a specific legislative change.

How can I find out the specific reason for my pension increase?

You should receive a notice from your pension plan administrator detailing the change and the reason for it. If not, contact your plan administrator directly. For Social Security, check your my Social Security account.