Although the terms raise and COLA (for cost-of-living adjustments) often are used interchangeably in the federal vocabulary, they are two very different types of increases.
COLAs are payable to retirees each January, based on the change in the average of a consumer price index from the third calendar quarter of the year that had just ended from the third calendar quarter of the preceding year. COLAs are thus a measure of inflation and are paid virtually automatically.
Those retired under the CSRS annuity system get the full COLA regardless of age while the COLA policy for those under the FERS system is more restrictive: in most cases the COLA is not paid until age 62. Also, if the COLA amount is above 3 percent, FERS retirees get the CPI figure minus 1 percentage point, and if the COLA falls between 2 and 3 percent, they get 2 percent. Further, COLAs are pro-rated for those who retired during the calendar year before the COLA is paid, depending on how many months they were retired in that year.
Raises, on the other hand, are determined during the annual congressional budget cycle, which starts with a recommendation from the White House. The raise formula is much more complicated, with the starting point being a measure of private sector wage growth called the employment cost index. Annual raises are paid regardless of whether the employee had worked the entire previous year.
The confusion arises because active employees commonly refer to their raises as COLAs, bringing with it a connotation in their mind that the raises should be linked to inflation. They also commonly believe that locality pay is thus linked to costs of living in a metropolitan area, not according to the labor market conditions; while the two often track, they don’t necessarily do so.
Retirees, on the other hand, commonly refer to their COLAs as “COLA raises” or just as “raises”—a continuation of the terminology they used through their working careers.
Retirees also often complain that active employees get larger increases than they do, arguing that inflation affects everyone the same. However, once again, raises for active employees are linked to labor market conditions, not to costs of living.