Federal retirees will see COLA boost in 2012

The Bureau of Labor Statistics on Wednesday released the Consumer Price Index figures for September, which are the final data point for determining the 2012 COLA. The CPI, a measure of the average change over time in the prices urban consumers pay for goods and services, rose 3.9 percent between September 2010 and September 2011, largely due to an increase in gasoline and food prices. COLAs are determined based on the CPI-W, a formula that takes into account increases in the CPI for urban wage earners and clerical workers.

Federal retirees under the Civil Service Retirement System as well as Social Security recipients will receive the full 3.6 percent COLA increase. Those in the Federal Employees Retirement System will receive a 2.6 percent bump in 2012. If the full COLA increase is 3 percent or higher, as it is for 2012, FERS retirees receive 1 percent less than the full increase. If the increase is less than 2 percent, FERS retirees receive the same as CSRS retirees.

The government publishes the annual cost-of-living adjustments typically in late October, based on the percentage increase (if any) in the average CPI-W for the third quarter of the current year over the average for the third quarter of the last year in which a COLA became effective. There hasn't been a COLA increase since 2008, when it rose 5.8 percent. This year's increase takes effect on Dec. 1, and will be reflected in retirees' first annuity payments in January 2012.

The salaries of federal employees are not affected by the COLA announcement.

"The 2012 COLA reflects higher costs for goods and services and is an important increase for federal retirees, who have not received a cost-of-living adjustment in either of the past two years, even as they face rising costs for the products and services they most use, including health care," National Treasury Employees Union President Colleen Kelley said in a statement.

The joint congressional committee on deficit reduction is considering switching to what's known as the "chained CPI" formula to determine COLAs for federal retirees and Social Security beneficiaries. It is viewed as a more accurate measure of how people substitute one item for another in the face of a price increase. The result would be lower COLAs over time.

For a more detailed analysis of how the COLA will affect you, check out our Oct. 14 Retirement Planning column.