This is the time of year when federal retirees look forward to an announcement about their cost-of-living adjustments for the upcoming calendar year. And that announcement is only a few weeks away. In anticipation of that event, let’s explore the history of annual COLAs to show how the policy evolved into what it is today.
The first law to provide automatic adjustments to civil service retirement and disability benefits was passed in 1962. These adjustments occurred whenever the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) for the current year exceeded the CPI-W in the year in which the last adjustment occurred by 3 percent or more and stayed that high for three consecutive months. However, that law was changed in 1965 so that the adjustment would only occur when a given month was at least 3 percent higher than the month in which the last adjustment was made and stayed at that level for three consecutive months.
Due to a rapidly increasing rate of inflation, in 1969, the law was amended to add one percentage point to the percentage change in the CPI-W in order to offset the erosion in benefits that had occurred as a result of the time lag in the adjustment formula.
In 1976 the law was once again changed to eliminate what was by then referred to as “the one percent kicker.” Instead, the law provided for semi-annual adjustments based on the CPI-W change from June to December and December to June.
Then in 1981 the law was once again revised to eliminate the semi-annual COLA adjustment and moved to a single adjustment based on a December to December change in the CPI-W, payable in March of the following year.
With the exception of the “payable” month, this change looks more like the COLA we’re familiar with today. However, as I’ll explain next week, radical change was in the wind and it would be a long time before stability was restored to the system.
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.
Read more on COLAs under FERS and CSRS at ask.FEDweek.com
See also, Raise, COLA Don’t Affect Each Other