How is the Annual COLA Different from an Annual Pay Raise?

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By on October 15, 2018 in Pay & Benefits, Retirement with 0 Comments

Woman looking perplexed standing in front of a group of white question marks on a gray background

Every year around this time, we receive comments and questions from our readers about the cost of living adjustment (COLA) and the pay raise. Each is determined around the same time of the year and both take effect in the following year, assuming that there is a COLA and/or pay raise.

It’s Confusing

The comments we see indicate that some federal employees and retirees do not understand the difference between the two. This is understandable; the federal pay and retirement systems are governed by a complex process with many different factors that can lead to endless variations depending on a person’s situation.

These are examples of the types of comments and questions we have received from our readers about the COLA and/or the pay raise:

  • I’d believe it [the announced COLA] once it’s approved. With Trump threatened (sic) to veto it, I have my doubts.
  • Why do current federal employees not get the same raise as retired federal employees? I think this is unfair.
  • Why isn’t the president giving federal retirees a pay raise next year? We have bills to pay too.

The purpose of this article is to explain the differences in the COLA and the annual pay raise in an effort to clear up any misconceptions or confusion.

The COLA

The 2019 COLA was just announced. This applies to federal retirees and Social Security recipients, but not to current federal employees. In 2019, it will be 2.8%.

The process for determining the COLA is automatic. You will either get one or not based solely on a formula that is put in place by law and determined based on the cost of living as measured by the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W).

The amount of the COLA has nothing to do with whether a Republican or a Democrat majority is in office, whether or not it might get vetoed, or out of the spite or benevolence reflected by the latest pet projects among politicians in Congress. If Congress decides to change the law governing how a COLA is calculated, then maybe it will become subject to politics, but as of right now, it’s not.

How is the COLA Calculated?

This is taken verbatim off of the Social Security Administration’s website as of the time of this writing. It is a description of how the COLA is calculated each year (remember when I said it was complicated?!):

COLA Computation

The last year in which a COLA became effective was 2017. Therefore the law requires that we use the average CPI-W for the third quarter of 2017 as the base from which we measure the increase (if any) in the average CPI-W. The base average is 239.668, as shown in the table below.

Also shown in the table below, the average CPI-W for the third quarter of 2018 is 246.352. Because this average exceeds 239.668 by 2.8 percent, the COLA effective for December 2018 is 2.8 percent. The COLA calculation, with the result rounded to the nearest one-tenth of one percent, is:

(246.352 – 239.668) / 239.668 x 100 = 2.8 percent.

CPI-W for—
2017 2018
July 238.617 246.155
August 239.448 246.336
September 240.939 246.565
Third quarter total 719.004 739.056
Average (rounded to the nearest 0.001) 239.668 246.352

Which Federal Retirees Get the COLA?

But wait, it gets more confusing! Not all federal retirees receive the same COLA.

For Civil Service Retirement System (CSRS) retirees, the COLA increase percentage is applied to their monthly benefit amount before any deductions, and is rounded down to the next whole dollar.

Under FERS or for FERS Special benefits, if the increase in the Consumer Price Index (CPI) is 2% or less, the COLA is equal to the CPI increase. If the CPI increase is more than 2% but no more than 3%, the Cost-of-Living Adjustment is 2%. If the CPI increase is more than 3%, the adjustment is 1% less than the CPI increase. The new amount is rounded down to the next whole dollar.

If the CPI is: Then the COLA is:
<= 2% COLA = CPI increase
> 2% and <= 3% COLA = 2%
> 3% COLA = CPI – 1%

In order to get the full COLA, without regard to whether you are in FERS or the CSRS system, you must have been getting paid as a retiree for a full year.

If you are planning on retiring late in the year, you will not get the full COLA increase in 2019. If you were not retired for the entire year, the increase is prorated. You will receive one-twelfth of the increase for each month in which you received retirement benefits.

Furthermore, 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.

The Pay Raise

So what about the annual pay raise?

Unlike the COLA, this process IS subject to politics. Who is in office can very much impact whether or not a pay raise is awarded to the federal workforce.

The annual pay raise is also different from the COLA in that it only applies to current federal employees. Federal retirees are not subject to the annual raise; the increase in their annuity payments is determined by the automatic COLA process as mentioned above.

What has happened most often in the last several years is that Congress remains silent on whether or not to give current federal employees a pay raise for the next year, and the president then sets the amount of the raise, usually in late August. 2019 is the first year in quite some time when we have seen this process differ; Congress has gotten involved and is working to override President Trump’s proposed pay freeze for 2019, in part because it is an election year (giving a raise = (hopefully) getting more votes for some in Congress). Remember, the pay raise is subject to politics!

As of the time of this writing, there is still no definitive word on whether or not federal employees (remember, only current federal employees) will get a pay raise next year.

Which Comes Out Ahead?

So who gets more? Do retirees get a higher COLA or do federal employees get a higher raise?

Once again, the two are mutually exclusive because of how they are determined. Consequently, the answer to this question will vary from year to year. Some years retirees fare better, other years current employees will get a higher raise, but the bottom line is one has nothing to do with the other.

I hope this clears up some of the understandable confusion around an inherently complex subject. Best of luck to our readers in getting the COLA or pay raise they have been hoping for!

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About the Author

Ian Smith is one of the co-founders of FedSmith.com. He enjoys writing about current topics that affect the federal workforce.

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