The differences between COLAs and salary hikes.
It’s the time of year when we clear out the old and start bringing in the new. For federal employees and retirees, that also means leaving your 2019 salary or retirement income behind and replacing them with more generous 2020 amounts.
If you’re recently retired or about to retire, you may wonder what the differences are in how these adjustments are arrived at and implemented. Here’s a brief list of things to know about annual pay raises and cost of living adjustments.
Retirement cost of living adjustments. These are designed, in short, to preserve the buying power of retirement income. Thanks to your COLA, you will have the same purchasing power—or the same ability to purchase the same amount of goods and services—that you did last year.
The history of COLAs. According to the Congressional Research Service, Congress passed the first law requiring automatic COLAs for federal civil service retirement benefits in 1962, and it has adjusted either the formula by which they are calculated or the date on which they take effect more than 10 times since then. The first COLA was granted in December 1965 and was 6.1%. The next COLA, 3.9%, didn’t occur until January 1967. In September 1980, a 7.7% COLA was implemented—after a 6% increase in March of the same year.
Pro-rated COLAs. All federal retirees do not receive the same COLA adjustment. For retirees who will have their retirement benefits start in January 2020 (FERS retirees who retired in December 2019 and CSRS retirees who retired in December 2019 or Jan. 1, 2, or 3, 2020), the first retiree COLA is due on Dec. 1, 2020 and payable in their January 2021 annuity check. This COLA will be computed at 11/12 of the 2020 COLA amount. FERS and FERS Special COLAs are not provided until age 62, except for disability, survivor benefits, and other special provision retirements (such as law enforcement officers, firefighters and air traffic controllers). FERS disability retirees get the adjustment, except when they are receiving a disability annuity based on 60 percent of their high-three average salary. Also, under FERS, if you have a CSRS component, the component is subject to the immediate CSRS COLA calculation. Finally, the FERS supplement does not receive a COLA.
“Diet” COLAs. FERS retirees may get a reduced COLA in some years. If the increase in the Consumer Price Index that is used to compute the COLA is 2% or less, the COLA is equal to the CPI increase. If the CPI increase is more than 2% but no more than 3%, the COLA is 2%. If the CPI increase is more than 3%, the adjustment is 1% less than the CPI increase.
General federal pay adjustment. The current version of the January pay raise for white collar federal employees dates back to the 1990 Federal Employee Pay Comparability Act, which uses a combination of across-the-board and locality pay adjustments. But presidents of both parties have complained about the method used to compute locality pay, so the law has never been fully implemented. Presidents have always used a loophole in the act to propose an alternative pay plan, and Congress ends up enacting an across-the-board raise. The 2020 pay adjustment, an average of 3.1%, is is the largest pay general pay increase since 2009, when it was 2.9%.
Lump sum annual leave payments. When you receive a lump sum payment for your annual leave at retirement or separation from federal service, your payroll office is obligated to pay it to you at the salary rate you would have earned if you had remained on the payroll to use the leave. Sometimes the payroll office will pay the additional 2020 amount on the following pay period due to adjustments that have to be made to the payroll system. so if you were initially paid the full amount at the 2019 rate, wait until the next payroll cycle to see if you get a supplemental payment in your bank account.
Life insurance increases. All federal employee pay increases, including the January pay adjustment, cause the amount of Basic FEGLI and FEGLI Option B to increase. Let’s say that your 2019 pay rate was $70,229 (a GS 9, Step 8 in Chicago), then your Basic FEGLI would have a death benefit valued at $73,000 if you are age 45 or older. In 2020, that same pay grade would earn $72,363, which would increase the value of the basic life insurance to $75,000 (and also increase the cost from $10.95 biweekly to $11.25 biweekly). The value of each multiple of Option B would also increase from $71,000 per multiple to $73,000. The cost of Option B increases every five years as you get older.