The Difference between Raises and COLAs

Although the terms raise and COLA (for cost-of-living adjustments) often are used interchangeably in the federal vocabulary, they are two very different types of increases and retirees and employees later in their careers, especially, should take the effort to know the difference.

COLAs are paid to retirees based on the change in the average of a consumer price index from the third calendar quarter of the year that had just ended from the third calendar quarter of the preceding year. COLAs are thus a measure of inflation and are paid automatically.

As it turned out, for the January 2016 adjustment, the inflation count finished negative and thus there will be no COLA (although benefits are not being reduced). That happened twice before in recent years, although long-term a COLA-less year is still a relative rarity.

When COLAs are paid, those retired under the CSRS annuity system get the full COLA regardless of age while the COLA policy for those under the FERS system is more restrictive: in most cases the COLA is not paid until age 62. Also, if the COLA amount is above 3 percent, FERS retirees get the CPI figure minus 1 percentage point, and if the COLA falls between 2 and 3 percent, they get 2 percent. Further, COLAs are pro-rated for those who retired during the calendar year before the COLA is paid, depending on how many months they were retired in that year.

Raises, on the other hand, are determined during the annual congressional budget cycle, which starts with a recommendation from the White House. The raise formula is much more complicated, with variations in amounts by locality and numerous special rules and exceptions applying. Annual raises are paid regardless of whether the employee had worked the entire previous year.

The confusion arises because active employees commonly refer to their raises as COLAs, bringing with it a connotation in their mind that the raises are, or at least should be, linked to inflation. They also commonly believe that locality pay is thus linked to costs of living in a metropolitan area, not according to the labor market conditions. While the two often track, they don’t necessarily do so.

Retirees, on the other hand, commonly refer to their COLAs as “COLA raises” or just as “raises”—often a continuation of the terminology they used for their annual adjustments through their working careers.