For the first time in three years, there will be an increase in the cost of living adjustment for federal retirees and those receiving Social Security checks.
The amount of the increase: 3.6% for CSRS retirees and Social Security recipients. The increase will be reflected in the annuity check that you will receive in January 2012.
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.
The last COLA increase was 5.8% in 2009 (based on 2008 inflation figures). The two years without any increase in the cost of living had not happened since the automatic increase formula for Social Security was established in 1975. Prior to these two years without any increase, the lowest annual adjustment was 1.3% in 1998. The reason for the lack of an increase the past two years was because, as reported by the federal government for this purpose, there was no inflation. (Also see Why Your Costs May Be Up But Your Retirement Income Goes Down)
Also for 2012, the maximum amount of earnings subject to the Social Security tax (taxable maximum) will increase to $110,100 from $106,800. Of the approximately 161 million workers who will pay Social Security taxes in 2012, about 10 million will pay higher taxes as a result of the increase in the maximum amount of earnings subject to the Social Security tax.
Life is Unfair–Or at Least Not Equal in All Cases
Some readers comment it is unfair for retirees to get a larger increase than those who are still working for Uncle Sam. That happened back in 2009 when many federal retirees received an increase of 5.8%. In that year, the average salary increase for federal employees was 3.9%.
And, as you may have heard, federal employees are under a pay freeze so, in 2012, federal retirees will get a bigger pay bump than those who are still working. Of course, it does not always work out that way, as some retirees will point out. There are many years when the average federal wage increase is larger than any COLA adjustment. (Also see The Financial Impact of a Salary Freeze or Retirement Computation Change On Your Future Income)
As some federal retirees like to point out, the average salary increase for feds who are still working does not take into account within-grade increases or promotions that many will receive, even if there is a pay freeze in effect.
No doubt, the “salary envy” will continue this year as many readers are incensed or at least unhappy about the pay freeze.
We know many retirees are thinking this increase will be largely absorbed by the 3.8% average increase in health insurance premiums for next year. (See 3.8 Percent Average Health Insurance Increase in 2012.
My advice: Dwell on the positive and be thankful for the increase. There were also substantial health insurance premium increases the past two years. At least in 2012, retirees will receive an additional amount in their annuity check to at least help to defray the other increases.