Refreshing COLA

By now, you may have read the news about the impending cost-of-living adjustment in federal retirement benefits that will be announced next week. This will be the first increase in two years for those under the Civil Service Retirement System and the Federal Employees Retirement System, along with Social Security recipients and military retirees. It looks like retirees will see an increase of more than 3 percent. (Salaries of federal employees are not affected by this COLA announcement -- they'll be under a pay freeze for the second year in a row.)

Cost-of-living adjustments for CSRS and FERS retirees are effective on Dec. 1 and will show up in the retirement payment on Jan. 1, 2012 (the December payment).

The COLAs are based on the percentage increase (if any) in the average Consumer Price Index for urban wage earners and clerical workers (known as the CPI-W) of the third quarter of the current year as compared to the average for the third quarter of the last year in which a COLA became effective. In this case, that would be 2008.

As of the end of August, the CPI-W was 3.8 percent above the 2010 level, and more than 3 percent above the 2008 third quarter average. Retirees will know the 2011 third quarter average numbers by next week. The COLA news is attracting the attention of federal employees who are planning to retire in 2011, because they anticipate getting the higher benefits with their first check. But that isn't exactly how it works.

CSRS

Under CSRS, the first COLA is prorated based on the number of months the retiree was retired before Dec. 1. To get 1/12 of the 2012 COLA, a CSRS retiree would have to retire no later than Nov. 3. For example, if the COLA was 3.5 percent and the retirement benefit was $5,000 per month, then the increase would be computed as 1/12 x 3.5% x $5,000, or $14.58 per month. If the retiree had retired on Jan. 3, he or she would be entitled to 11/12 of the COLA that is due on Dec. 1. To get the full 2012 COLA, the CSRS retirement date must be no later than Dec. 3, 2010.

The COLA for military retirees is computed in the same way as it is for CSRS retirees.

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 the retiree is already 62 in the first year of retirement, then the first COLA will be prorated as described above for CSRS.

There are exceptions to the delayed COLA for 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 spouses, former spouses or insurable interests of 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, FERS retirees will receive the same as CSRS retirees. 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 a Social Security Administration fact sheet, Social Security COLAs are computed using the same formula as those used for CSRS and FERS retirees. But the first COLA under Social Security is not prorated.

Still, for Social Security beneficiaries who have Medicare premiums withheld from their monthly Social Security payments, the increase may not be as large as expected. Due to a "hold harmless" provision in federal law that does not allow Medicare Part B premium withholding to be increased if there is no COLA, there has not been an increase in the Medicare Part B withholding since 2008. Then, the monthly rate was $96.40. The actual rate for the Part B stands at 115.40 for 2011 and the new rate has not been announced for 2012.

If Social Security benefits increase in 2012, the hold harmless provision will be lifted and some of the COLA increase will be used to pay the new premiums for Part B. By law, the Part B premium increase cannot be larger than a beneficiary's COLA increase.

CSRS retirees who do not receive Social Security retirement benefits have not been covered by the hold harmless provision and have not had their Medicare rates frozen if they were being withheld from their CSRS retirement checks or if they have been paying quarterly payments.

Tammy Flanagan is the senior benefits director for the National Institute of Transition Planning Inc., which conducts federal retirement planning workshops and seminars. She has spent 25 years helping federal employees take charge of their retirement by understanding their benefits.

For more retirement planning help, tune in to "For Your Benefit," presented by the National Institute of Transition Planning Inc. live on Mondays at 10 a.m. EDT on federalnewsradio.com, or on WFED AM 1500 in the Washington-metro area.