While chances are fairly good that current federal employees will receive an across-the-board increase of 1.3% in 2016, what are the chances of a cost of living adjustment (COLA) increase for federal retirees in 2016?
At the moment, it does not look favorable. Unlike the annual federal employee pay raise, if any, the method of computing the cost of living adjustment (COLA) for federal retirees is an automatic one and calculated outside of the political process. That sometimes works out better for current federal employees and sometimes it works out better for retirees. For those who like to contend one group or the other gets a better deal overall, check out the article Federal Pay Raises Through the Years that provides historical data on this issue.
COLAs for federal retirement annuities, as well as for military retiree annuities and Social Security payments, are determined by the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) index. This index is calculated by the Bureau of Labor Statistics. The CPI-W is the current index used for measuring increases in the prices of consumer goods, including food and beverages, housing, clothing, transportation, medical care, recreation, and education.
The Social Security Act specifies a formula for determining each COLA. As might be expected, the calculations are not necessarily quick and easy. Generally, a COLA effective for December of the current year is equal to the percentage increase (if any) in the average CPI-W for the third quarter of the current year over the average for the third quarter of the last year in which a COLA became effective. If there is an increase, it must be rounded to the nearest tenth of one percent. If there is no increase, or if the rounded increase is zero, there is no COLA.
As of May, there will not be a COLA for federal retirees next year. Some readers will recall there was no COLA for retirees in 2010 and 2011 but in 2012 there was a 3.6% COLA for employees under the Civil Service Retirement System (CSRS) for those who had been receiving benefits for at least one year. While the cost of living went up according to the CPI-W for the month of May 2015, the index still shows a negative figure for next years COLA as indicated by this chart which will give readers an idea of how the calculations now stack up for a COLA increase in 2016.
|CPI-W||Monthly % Change||% Toward 2016 COLA|
Calculating the COLA
For most readers, it is enough to know that, as of this month, there will not be a COLA increase next year. That could change quite a bit before the final calculations are made in October.
Calculating the return is often not as simple as looking at the BLS calculations. For many readers with an insatiable curiosity, you will want to check with your servicing human resources office for advice for your particular situation as there are a few variations. For those brave enough to venture through the system, here is how the Office of Personnel Management (OPM) describes the COLA calculations.
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 receive a full COLA, a retiree or survivor annuitant must have been in receipt of payment for a full year. If not, the increase is prorated under both plans. Prorated accounts receive one-twelfth of the increase for each month they received benefits.
Federal Employees Retirement System (FERS) and FERS Special Cost-of-Living Adjustments are not provided until age 62, except for disability, survivor benefits, and other special provision retirements. FERS disability retirees get the adjustment, except when they are receiving a disability annuity based on 60 percent of their high-3 average salary. Also, under FERS, if you have a CSRS component, the component is subject to the CSRS COLA calculation. FERS survivors receive the FERS increase on their entire annuity, even where component service is involved.
FedSmith will keep our readers informed of changes for the 2016 topics of a federal pay raise and a 2016 COLA as changes occur.