Finally, Time to Crack Open a COLA

Finally! After two years without cost-of-living adjustments, all Social Security recipients got an increase in their benefits. And so did most federal retirees. Let me explain why some federal retirees received the full amount, some a prorated amount, and still others none at all.

Social Security beneficiaries automatically received the full amount of any COLA, in this case 3.6 percent, in their January annuity payment, even if they retired only last month. Whether federal retirees received a COLA, and how much, depends of several things, among them, the retirement system they are in.

While most CSRS retirees can receive a full COLA regardless of their age, most FERS retirees can only receive a COLA on the civil service portion of their benefits after they have reached age 62. The exceptions are law enforcement officers, firefighters and air traffic controllers, military reserve technicians who lost their military status due to medical reasons, disability retirees, and survivors.

Further the COLA all FERS retirees receive will generally be less than the amount their CSRS counterparts get. The reason for that difference is found in the law that created FERS. Taking this year as an example, the CSRS adjustment is 3.6 percent, while the adjustment for eligible FERS retirees is 1 percentage point less, or 2.6 percent. If the adjustment had been between 2 and 3 percent, the FERS adjustment would have been 2 percent. If it had been less that 2 percent, CSRS and FERS retirees would have received the same amount.

Finally, there’s one more wrinkle to deal with. Both CSRS and FERS COLAs are prorated based on the number of months an individual has been on the annuity roll. For example, if you retired at the end of November 2011 (or up to December 3, if you were covered by CSRS), you’d be on the annuity roll in December 2011 and eligible for your first full COLA in January 2013. If you retired at the end of December (or up to January 3, if you were covered by CSRS), you’d be on the annuity roll in January and eligible for 11/12 of the COLA in January 2013.

In these troubled times, give thanks for what you get and when you get it. COLAs have been on a bumpy road since they became automatic in 1962. Before that a specific act of Congress was required to adjust annuities. Even then, it didn’t happen unless the change from the previous year was 3 percent or more. Beginning in1965 it had to be at least 3 percent higher than it was in the month when the last adjustment was made, and remained at that level for three consecutive months.

In 1969, during a high inflation period, the 1 percent “kicker” was introduced. Whenever a COLA was due, 1 percent was added to offset the erosion of benefits. That lasted until 1976, when semi-annual adjustments were introduced. In 1981, semi-annual COLAs were replaced with annual ones, payable in March of the following year. In 1982, COLAs were set to be delayed by one month in fiscal years 1983,’84 and ’85 and the date payable moved to June. However, this provision was repealed in 1984 when the COLA scheduled for May was moved forward to December, payable in January (got that?). Further, by law all future COLAs would be effective in December and payable in January. For the first time this put retiree annuity COLAs on the same schedule as Social Security recipients.

Just when you’d think everything was settled, the COLAs for 1986 were suspended because deficit reduction targets for the year wouldn’t be met. The same was supposed to happen in any years where those targets weren’t met. Later Congressional action reinstated the COLAs for 1987 through 1991. It took another act of Congress to permanently exempt COLAs from such suspensions.

That settled things for all time, didn’t it? No. In 1993, the COLA payment date was switched from January to April for FY 1994 through FY1996.

Although the lack of COLAs over the last two years had nothing to do with the Congress, like dormant volcanoes, the potential for another Congressional eruption is always a possibility.