The largest federal retirement COLA in four decades will be paid in January, 8.7 percent for those retired under CSRS and 7.7 percent for those retired under FERS.
The increase will follow the 5.9 percent/4.9 percent COLAs paid at the start of this year and match the 8.7 percent increase in 1982, before the FERS system even existed, the largest since automatic annual inflation adjustments for federal annuities began in the mid-1960s. The announcement follows completion of the count toward the 2023 adjustment on Thursday (October 13).
Those retired under CSRS or CSRS Offset receive a COLA regardless of their age. However, those retired under FERS don’t receive COLAs until age 62 unless they retired on disability or under the special retirement provisions for law enforcement officers, firefighters or air traffic controllers (note: survivor beneficiaries under each system receive COLAs regardless of age). In addition, in situations such as this one in which the count exceeds 3 percent, the payout to those eligible under FERS is reduced by 1 percentage point.
An 8.7 percent increase also will be paid on Social Security benefits. That’s primarily of interest to FERS retirees, for whom Social Security is a basic part of the retirement benefit, but also of interest to CSRS Offset retirees who have Social Security coverage as part of their benefit. Also, some “pure” CSRS retirees qualify for Social Security through from military service or earnings covered under that system before, after—and in some cases from outside earnings during—their CSRS working years. In many cases those benefits are reduced by the “windfall elimination provision” however.
Federal retirement COLAs are prorated for those who retired, or who will retire, in the current calendar year. Social Security COLAs are not prorated for recent retirees.
The retiree COLA does not directly impact the potential January 2023 pay raise for active federal employees; while the former is determined automatically by an inflation count, the latter is determined through the congressional budget process. Congress appears to be on track to accept a raise payout by default of President Biden’s recommendation for a 4.6 percent average raise, with 4.1 percentage points to be paid across the board and the funds for the remainder divided as locality pay.
Cost-of-living-adjustments (COLAs) are effective on December 1 of each year and are applied to the annuity payments made the following month. COLAs for those retired less than one year are prorated according to the date on which they retired. If you retire in January, your first adjustment will be made in January of the following year and will be for 11/12ths of the COLA amount. If you retire in February it will be 10/12ths, and so forth. Future COLAs will be for the full amount.
COLA Based on Consumer Price Index
The COLA is based on the change in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI/W) average of the third calendar quarter of one year to the next. If the inflation count finishes negative, benefits are frozen but not reduced. Also, in that situation the starting point for the next COLA count remains the same.
Note: Social Security COLAs follow the same formula except that a full Social Security COLA is paid even to someone who has drawn benefits for less than a year.