The Incredible Shrinking COLA

This year's small retiree cost of living adjustment could be a harbinger of the future.

Retirees have always had to be careful about their spending because they don’t receive increases to their income in the same way as working, salaried employees do. As a practical matter for federal retirees, this means no promotions, step increases or across-the-board raises.

There are, however, cost of living adjustments for Social Security benefits, military retirement compensation and federal civilian retirement benefits under both the Civil Service Retirement System and the Federal Employees Retirement System. These COLAs are designed to maintain retirees’ buying power in their golden years.

This week, the federal government announced that the COLA for federal retirees and Social Security recipients will be 1.5 percent in 2014. Cost-of-living adjustments for CSRS and FERS retirees are effective on Dec. 1 and will show up in the Jan. 1, 2014 retirement payment (covering December 2013). The COLAs are based on the percentage increase in the average Consumer Price Index for urban wage earners and clerical workers (known as the CPI-W), as determined by the Bureau of Labor Statistics.

The CPI-W group represents 32 percent of the total U.S. population and is a subset of the CPI for all urban consumers. The third quarter index (usually announced at the end of September) is compared to the third quarter index of the previous year to determine the amount of the retiree COLA. Due to the government shutdown, the announcement at the end of September was delayed until this week.

According to BLS, prices for the goods and services used to calculate the CPI are collected in 87 urban areas throughout the country and from about 23,000 retail and service establishments. Included in the data are prices for food, energy, commodities such as new and used cars, apparel, medical care, shelter and transportation.

The way the CPI is used in computing COLAs for federal benefits could be changing. Lawmakers and the Obama administration have been contemplating switching to what is known as “chained CPI.” According to a 2003 Bureau of Labor Statistics report, the idea behind the chained CPI, which dates back to 1961, is to reflect consumer substitution in calculating the index. That involves tracking prices among specific products within a certain type of item (such as a leather watchband versus a stainless steel one or whole wheat bread versus white bread) and across different categories of items (such as theater tickets versus video rentals or beer versus wine). Evidence suggests that over time, the chained CPI would trend slightly lower than the standard CPI. Various groups that represent federal employees and retirees, such as the National Active and Retired Federal Employees Association, have lobbied against switching to the chained CPI.

For now, the standard CPI-W is the mechanism by which federal benefit COLAs are calculated. Let’s look at how this plays out.

CSRS

Under CSRS, the first COLA received in retirement is prorated based on the number of months the retiree was retired before Dec. 1. To get 1/12 of the 2014 COLA, a non-disability CSRS retiree would have to retire no later than Nov. 3, 2013. For example, if the retiree’s benefit was $5,000 per month, then the increase would be computed as 1/12 x 1.5% x $5,000, or $6.25 per month. If the retiree had retired on Jan. 3, 2013, he or she would be entitled to 11/12 of the COLA that is due on Dec. 1. To get the full 2014 COLA, the CSRS retirement date must be no later than Dec. 3, 2012. The full 1.5 percent  COLA on a $5,000 CSRS retirement would add $75 per month in extra income for 2014.

FERS

Under FERS, there is no COLA until after age 62 for most retirees and a retiree must have turned 62 before Dec. 1 to receive the first adjustment. For FERS annuitants who are not eligible to receive a COLA during their first year (or more) on the annuity roll, the initial COLA they receive after becoming eligible is the full COLA without proration. If a retiree is already 62 in his or her first year of retirement, then the first COLA will be prorated as described above for CSRS.

There are exceptions to the delayed COLA for some groups: disability annuitants who are not receiving 60 percent of their average salary; military reserve technicians who are medically disqualified from service; employees who retired under special provisions for law enforcement officers, firefighters, or air traffic controllers; and survivor annuitants who are the spouses, former spouses and eligible dependent children of deceased employees and retired employee annuitants as well as the individuals receiving insurable interest survivor annuities of deceased retired employees. These retirees will receive their first COLA regardless of their age.

One more thing: The FERS COLA is sometimes referred to as a "diet COLA," because if the full COLA increase is 3 percent or higher, FERS retirees receive 1 percent less than the full increase. So if the full increase is between 2 percent and 3 percent, FERS retires will receive a 2 percent boost. If the increase is less than 2 percent, as it was this year, FERS retirees receive the same as CSRS retirees. With a 1.5 percent increase for 2014, a FERS basic retirement benefit of $2,500 a month would increase by $37.50 a month. Retirees with a CSRS component to their retirement (who transferred to FERS) will receive the immediate full COLA on the CSRS portion and the reduced and delayed COLA on the FERS portion.

Social Security

According to the Social Security Administration, Social Security COLAs are computed using the same formula as those used for CSRS and FERS retirees (but the full, rather than the “diet” COLA). The difference is that the first COLA under Social Security is not prorated or delayed, as it is for CSRS and FERS.

NEXT STORY: FEHBP As a Model of Health

X
This website uses cookies to enhance user experience and to analyze performance and traffic on our website. We also share information about your use of our site with our social media, advertising and analytics partners. Learn More / Do Not Sell My Personal Information
Accept Cookies
X
Cookie Preferences Cookie List

Do Not Sell My Personal Information

When you visit our website, we store cookies on your browser to collect information. The information collected might relate to you, your preferences or your device, and is mostly used to make the site work as you expect it to and to provide a more personalized web experience. However, you can choose not to allow certain types of cookies, which may impact your experience of the site and the services we are able to offer. Click on the different category headings to find out more and change our default settings according to your preference. You cannot opt-out of our First Party Strictly Necessary Cookies as they are deployed in order to ensure the proper functioning of our website (such as prompting the cookie banner and remembering your settings, to log into your account, to redirect you when you log out, etc.). For more information about the First and Third Party Cookies used please follow this link.

Allow All Cookies

Manage Consent Preferences

Strictly Necessary Cookies - Always Active

We do not allow you to opt-out of our certain cookies, as they are necessary to ensure the proper functioning of our website (such as prompting our cookie banner and remembering your privacy choices) and/or to monitor site performance. These cookies are not used in a way that constitutes a “sale” of your data under the CCPA. You can set your browser to block or alert you about these cookies, but some parts of the site will not work as intended if you do so. You can usually find these settings in the Options or Preferences menu of your browser. Visit www.allaboutcookies.org to learn more.

Sale of Personal Data, Targeting & Social Media Cookies

Under the California Consumer Privacy Act, you have the right to opt-out of the sale of your personal information to third parties. These cookies collect information for analytics and to personalize your experience with targeted ads. You may exercise your right to opt out of the sale of personal information by using this toggle switch. If you opt out we will not be able to offer you personalised ads and will not hand over your personal information to any third parties. Additionally, you may contact our legal department for further clarification about your rights as a California consumer by using this Exercise My Rights link

If you have enabled privacy controls on your browser (such as a plugin), we have to take that as a valid request to opt-out. Therefore we would not be able to track your activity through the web. This may affect our ability to personalize ads according to your preferences.

Targeting cookies may be set through our site by our advertising partners. They may be used by those companies to build a profile of your interests and show you relevant adverts on other sites. They do not store directly personal information, but are based on uniquely identifying your browser and internet device. If you do not allow these cookies, you will experience less targeted advertising.

Social media cookies are set by a range of social media services that we have added to the site to enable you to share our content with your friends and networks. They are capable of tracking your browser across other sites and building up a profile of your interests. This may impact the content and messages you see on other websites you visit. If you do not allow these cookies you may not be able to use or see these sharing tools.

If you want to opt out of all of our lead reports and lists, please submit a privacy request at our Do Not Sell page.

Save Settings
Cookie Preferences Cookie List

Cookie List

A cookie is a small piece of data (text file) that a website – when visited by a user – asks your browser to store on your device in order to remember information about you, such as your language preference or login information. Those cookies are set by us and called first-party cookies. We also use third-party cookies – which are cookies from a domain different than the domain of the website you are visiting – for our advertising and marketing efforts. More specifically, we use cookies and other tracking technologies for the following purposes:

Strictly Necessary Cookies

We do not allow you to opt-out of our certain cookies, as they are necessary to ensure the proper functioning of our website (such as prompting our cookie banner and remembering your privacy choices) and/or to monitor site performance. These cookies are not used in a way that constitutes a “sale” of your data under the CCPA. You can set your browser to block or alert you about these cookies, but some parts of the site will not work as intended if you do so. You can usually find these settings in the Options or Preferences menu of your browser. Visit www.allaboutcookies.org to learn more.

Functional Cookies

We do not allow you to opt-out of our certain cookies, as they are necessary to ensure the proper functioning of our website (such as prompting our cookie banner and remembering your privacy choices) and/or to monitor site performance. These cookies are not used in a way that constitutes a “sale” of your data under the CCPA. You can set your browser to block or alert you about these cookies, but some parts of the site will not work as intended if you do so. You can usually find these settings in the Options or Preferences menu of your browser. Visit www.allaboutcookies.org to learn more.

Performance Cookies

We do not allow you to opt-out of our certain cookies, as they are necessary to ensure the proper functioning of our website (such as prompting our cookie banner and remembering your privacy choices) and/or to monitor site performance. These cookies are not used in a way that constitutes a “sale” of your data under the CCPA. You can set your browser to block or alert you about these cookies, but some parts of the site will not work as intended if you do so. You can usually find these settings in the Options or Preferences menu of your browser. Visit www.allaboutcookies.org to learn more.

Sale of Personal Data

We also use cookies to personalize your experience on our websites, including by determining the most relevant content and advertisements to show you, and to monitor site traffic and performance, so that we may improve our websites and your experience. You may opt out of our use of such cookies (and the associated “sale” of your Personal Information) by using this toggle switch. You will still see some advertising, regardless of your selection. Because we do not track you across different devices, browsers and GEMG properties, your selection will take effect only on this browser, this device and this website.

Social Media Cookies

We also use cookies to personalize your experience on our websites, including by determining the most relevant content and advertisements to show you, and to monitor site traffic and performance, so that we may improve our websites and your experience. You may opt out of our use of such cookies (and the associated “sale” of your Personal Information) by using this toggle switch. You will still see some advertising, regardless of your selection. Because we do not track you across different devices, browsers and GEMG properties, your selection will take effect only on this browser, this device and this website.

Targeting Cookies

We also use cookies to personalize your experience on our websites, including by determining the most relevant content and advertisements to show you, and to monitor site traffic and performance, so that we may improve our websites and your experience. You may opt out of our use of such cookies (and the associated “sale” of your Personal Information) by using this toggle switch. You will still see some advertising, regardless of your selection. Because we do not track you across different devices, browsers and GEMG properties, your selection will take effect only on this browser, this device and this website.