First COLA in Three Years for Federal Retirees

Inflation has been very low for the past two years and federal retirees and those receiving Social Security payments have not had an increase. That is likely to change in 2012. Here’s why and how much.

Several readers have inquired recently about a possible cost of living increase for 2012 for federal retirees.

Here is the good news: Some federal retirees and Social Security recipients may start getting a payment that is about 3.5 percent higher in 2012. That figure is not final as the final calculations can only be made after September data is released on October 19. The the 3.5 percent estimate is based on August data, released on September 15, and on July data as calculated by several financial services sites.

If you are already retired, you probably recall that you did not get an increase in your payment for the past two years. For the past two years, inflation has been virtually non-existent—at least as it is measured by the federal government for COLA increases.

In effect, the COLA increase you receive (if there is one) does not take into account a number of items that may be more relevant to people who are retired. The index that is used is called the CPI-W index. The CPI-W is called the index for Urban Wage Earners and Clerical Workers.

The urban wage earner and clerical worker population consists of consumers with clerical workers, sales workers, craft workers, operative, service workers, or laborers. It excludes professional, managerial, and technical workers; the self-employed; short-term workers; the unemployed; and retirees and others not in the labor force.

So, for example, people who are retired often use medical services more than the general population as they are older. Retirees may also use less gas as they are often not driving to work everyday and, in general, probably don’t buy as many television sets or toys or new houses as younger people may do.

But this is the index used to calculate the cost of living increase for federal retirees. As many readers will recall, there was no COLA increase in 2010 or in 2011. (See What Happened to My COLA?) Some readers have asked if there has ever been a time when there was no COLA increase for two years in a row. That has not happened. In fact, if you look back at the history of the COLA, there was never a time when the increase was 0.0% as happened in 2010. Prior to 2010, the lowest COLA increase was 1.3% in 1998.

Here is how your cost of living increase is calculated according to the Office of Personnel Management.

  • For Civil Service Retirement System (CSRS) or Organization and Disability Retirement System (ORDS) benefits, the increase percentage is applied to your monthly benefit amount before any deductions, and is rounded down to the next whole dollar.
  • For Federal Employees Retirement System (FERS) or FERS Special benefits, if the increase in the CPI is 2 percent or less, the Cost-of-Living Adjustment (COLA) is equal to the CPI increase. If the CPI increase is more than 2 percent but no more than 3 percent, the Cost-of-Living Adjustment is 2 percent. If the CPI increase is more than 3 percent, the adjustment is 1 percent less than the CPI increase. The new amount is rounded down to the next whole dollar.

To qualify for the pay increase in your retirement check, a retiree or survivor annuitant must have been receiving a payment for a full year. If you have not been receiving such a payment, the increase is prorated. Prorated accounts receive one-twelfth of the increase for each month they received benefits.

When the final figures become available, we will provide the information for our readers. Note that for some readers, the increase in your health insurance premium in 2012 may absorb at least some of the increase you will receive in your retirement payment.

About the Author

Ralph Smith has several decades of experience working with federal human resources issues. He has written extensively on a full range of human resources topics in books and newsletters and is a co-founder of two companies and several newsletters on federal human resources. Follow Ralph on Twitter: @RalphSmith47