One of the best benefits provided to federal retirees is the annual cost-of living adjustment. COLAs are based on a subset of inflation data collected by the Bureau of Labor Statistics called the CPI/W.
How COLAs are determined today
COLAs are effective on December 1, with the increases showing up in the January annuity payments of those who are eligible to receive them. The date on which you retire determines how much — if anything — you will receive next year. For example, if you retired in of December 2017, you would not be eligible to receive a COLA until January 2019. For each month that you retired before December 2017, you’d receive 1/12th of the COLA.
The difference in COLAs provided to CSRS and FERS retirees is a product of the law that created FERS. It provided that when the CPI/W increases by 3 percent of more in any year, FERS-covered retirees and survivors will get 1 percent less than that. If the CPI/W goes up by 2 to 3 percent, the adjustment will be 2 percent. If it increases by less than 2 percent, the adjustment will be the same as the CPI/W.
There’s one big difference between CSRS and FERS when it comes to the payment of COLAs. CSRS retirees receive COLAs regardless of the age at which they retire. With one exception, FERS retirees only begin receiving them when they reach age 62. The exception is for special category employees, such as law enforcement officers, firefighters and air traffic controllers, disability retirees, and certain military reserve technicians who lost their military status due to medical reasons.
How COLAs might be determined in the future
The President’s 2018 budget proposal included two changes that would radically alter the financial picture for federal retirees. The least radical of these changes would be to reduce the COLAs CSRS retirees receive by a half-percentage point below what the current formula now provides.
The more radical change would be to eliminate COLAs for all FERS retirees (although they still would be eligible for COLAs on their Social Security benefits when they start drawing those after age 62).
In the last nine years, COLAs have averaged under 2 percent; only twice in those years has the CPI/W exceeded 2 percent and triggered the reduction in the FERS benefit. In three of those years there was no COLA because the inflation count had finished in negative territory.
In such a period, the impact of what is being proposed would result in belt tightening but perhaps not a basic change in lifestyle for retirees.
But remember there’s no guarantee that inflation will remain this low. In the 2005-2009 COLAs, the CSRS figure averaged 3.64 percent; because of the FERS reduction factor, the average annual COLA in that system was 2.84 percent in those five years. Losing half of the former benefit and all of the latter would be another story. Not to mention a period of much higher inflation such as the late 1970s through mid-1980s.
Will this proposal become law? It didn’t last year but it would be no surprise if the idea is pursued again this year. Time is passing, so let you representatives in Congress know how you feel about it.