Higher Inflation At Least Means Higher COLAs

The Bureau of Labor Statistics reported this week that the Consumer Price Index for All Urban Consumers was unchanged in July (on a seasonally adjusted basis), after rising 1.3% in June and 1% in May. Gas prices fell 7.7% in July, offsetting increases in food and shelter. From July 2021 to July 2022, the index for all items increased 8.5% (not seasonally adjusted).

The BLS reports have been making headlines every month lately, because unusually high inflation rates have a direct impact on the retirement benefits of Social Security recipients, military retirees and civilian federal retirees under either the Civil Service Retirement System or the Federal Employees Retirement System. But the July index isn’t the end of the story. It’s the beginning.

Cost-of-living adjustments for CSRS and FERS retirees are based on the rate of inflation as measured by the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). COLAs are determined by the average monthly CPI-W during the third quarter (July to September) of the current calendar year and the third quarter of the base year, which is the last previous year in which a COLA was applied.

The effective date for COLAs is December, but they first appear in the benefits issued the following January. So there are still two months to go to determine this year’s COLA. If prices fall, then the COLA for this year will be less than 8.5%, however, if prices go up in the next two months, retirees could see a higher COLA in their January retirement check, which is the payment for December. 

All CSRS retirees and survivors receive COLAs equal to the percentage change in the CPI-W during the measurement period. New retirees receive a prorated COLA based on the number of months they were retired before the COLA became effective. For example, if a CSRS employee retires on Aug. 31, 2022, they would receive 3/12 (1/4) of the 2022 inflation adjustment.

Under FERS, nondisabled retirees under the age of 62 do not receive COLAs. Survivors and disabled retirees (as well as special groups subject to mandatory retirement, such as law enforcement officers and firefighters) are eligible for COLAs under FERS regardless of age. The FERS COLA is limited if the rate of inflation is greater than 2%. If inflation during the measurement period is between 2% and 3%, the COLA under FERS is 2%. If inflation is greater than 3%, then the COLA for FERS is equal to the CPI-W minus one percentage point. 

In 2021, the COLA was based on the third quarter of 2020 to the third quarter of 2021, where the CPI-W increased by 5.9%. Therefore, beginning in January 2022, the CSRS COLA was 5.9% and the FERS COLA was 4.9%. FERS retirees who were 62 prior to December 2021 and who were retired for at least 12 months received the 4.9% COLA. Those CSRS and FERS retirees whose retirements were effective after November 2020 received a prorated COLA based on the number of months they were retired prior to the December 2021 effective date. The same will be true for this year’s COLA.

It’s interesting to note that according to BLS, consumer food prices increased 10.9% from July 2021 to July 2022, the largest 12-month increase since the period ending in May 1979. Energy prices rose 32.9% over the past year. Gas increased 44%, and fuel oil rose a whopping 75.6%. Consumer prices for electricity rose 15.2%, the largest 12-month jump since February 2006.

A Note on Last Week’s Column

Last week, I covered the topic of survivor benefit elections made at the time of retirement for FERS employees. For CSRS employees, the rules are very similar. Here are the options for CSRS employees who are providing full or partial survivor benefits for their spouse:

A reduced annuity with maximum survivor annuity for your spouse. If you’re married on the date of your retirement, your spouse is entitled by law to this annuity. It provides 55% of your unreduced CSRS benefit to your spouse if they outlive you. The benefit is payable for the life of your surviving spouse, regardless of how long they live.

If you get married after your retirement date, your spouse does not have a right to the survivor benefit. You have two years to decide whether you want to provide it for them. The decision on whether to do so is important, because once you provide one, no changes are permitted unless your marriage ends through death or divorce. In the case of divorce, you have two years to choose to provide a survivor annuity for your former spouse.

The reduction to your retirement benefit to provide the maximum survivor annuity benefit is a little less than 10% of your unreduced retirement benefit. The cost is only 2.5% of the first $3,600 of your unreduced CSRS benefit and then 10% of the remainder.

A reduced annuity with a partial survivor annuity for your spouse. If you choose this option, your CSRS retirement benefit will be reduced by a smaller amount depending on the base amount you choose. Your surviving spouse will be entitled to 55% of the base amount elected. The partial survivor election generally is used if your spouse needs your health benefits, but not necessarily the income from your annuity.

This choice requires the notarized consent of your spouse, because they are entitled to a full annuity as outlined above.