Reg Jones Expert's View

One of the best features of federal retirement – besides not having to go to work – is a financial blessing bestowed on retirees. Almost unique among retirement systems in the U.S., federal retirees are blessed with annual cost-of-living adjustments. What we affectionately refer to as COLAs.

It may be hard to believe but once upon a time federal retirees didn’t receive any cost-of-living adjustments. The law was changed to provide for them in 1962. However, it wasn’t until 1965 that formula used resulted in a payout. In 1969 one percentage point was added to the basic calculation to offset the erosion of benefits caused by the lag time between the data being gathered and the payout. Everyone called that the 1 percent kicker. That lasted until 1976 when it was replaced by twice yearly COLA adjustments, payable in March and December. Can you believe that? Things came down to earth in 1981, when one-a-year COLAs were made the norm.

Since 1984, with rare exception, retirees have been able to count on their annuities being increased every year, and for that increase to show up in their January annuity payment. The reason it shows up in January is because the data on which the adjustment is based becomes effective in December of the preceding year. And, as you know (or should know), your monthly annuity is paid after the fact. In other words, you aren’t entitled to receive a payment for a month until you have completed it.

This year CSRS retirees are receiving an increase of 4.1 percent, while FERS retirees are getting 3.1 percent, and then only when they reach age 62. There aren’t any age restrictions on CSRS retirees. The reason for the difference is found in law. For whatever reason, Congress decided that when the annual change in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI/W) increases by 3 percent or more, the COLAs of FERS beneficiaries will be increased by the CPI/W minus 1 percent.

Because COLAs are prorated to fit the amount of time you’ve been on the annuity roll, to be entitled to receive a full COLA in 2006, you’d have to have been on the roll in December 2004. If you were first on the roll in January 2005, you would be entitled to only 11/12ths of the COLA, in February 10/12ths, and so forth. If you are one of those who retired at the end of December 2005 (FERS) or up to the third day of January 2006 (CSRS), you won’t be entitled to a prorated COLA increase until January 2007.

While I have directed this information to retirees, it’s important to understand that these COLAs are payable also to survivors and disability retirees. The big difference is that survivors and disability retirees covered by FERS may receive them regardless of their age. As noted above, all other FERS retirees have to wait until age 62.

Next time I’ll talk about out-of-pocket increases for health benefits.