COLAs, Locality Pay and Raises

Why did federal employees get a smaller raise than the annual COLA? Here is a quick explanation.

The federal pay and retirement systems are complex and confusing. That is understandable as there are numerous systems with considerable differences.

One of the most common sources of confusion is the difference in how payments are increased for current federal employees and federal retirees each year (if they are increased at all).

2019 Pay and COLAs

2019 is actually more confusing than usual because of a government shutdown that extended beyond the end of 2018 and legislation that ultimately overturned an executive order that did not provide a federal employee pay raise which led to the raise being paid retroactively.

A few readers have posed questions, probably reflecting their hope for an increase in their monthly income. In most cases though, the hope for a bigger increase is misplaced.

In 2019, the annual cost of living adjustment (COLA) was 2.8%. The process for determining the amount of a COLA increase, if any, is automatic. The amount of a COLA a federal retiree or Social Security recipient will receive at the start of a new year is based solely on a pre-determined formula. This formula is not an annual political decision but is 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).

Unfair to Current Employees?

Some current federal employees have commented it was unfair that retirees would receive a pay raise through a COLA but that current employees would not get a raise. (At the time, no pay raise for current employees was scheduled.)

It may be true that the process is unfair, but the pay raise for federal employees is, in effect, a political decision. Determining an annual raise for federal employees is not, as the COLA is, an automatic calculation separate from the political process.

Ultimately, current federal employees received an average pay raise of 1.9% (some received more or less than that). That was still less than the 2.8% COLA for federal retirees but certainly better than no raise at all which had appeared to be the most likely outcome.

What About Locality Pay?

When the amount of a federal pay raise was ultimately determined, locality pay rates were also announced.

As most readers know, locality pay means that federal employees in some areas receive higher pay than federal employees receive in other areas. In 2019, federal employees in the Washington, DC and San Francisco, CA areas received the largest pay raise as a result of locality pay.

Some federal retirees raised this question: “When do I receive the locality pay raise in my check?”

The answer is simple. If you are a retired federal employee, you do not receive a locality pay raise in your retirement check. The locality pay system only applies to current federal employees and not those who are retired.

And, a related comment that is sometimes stated: “It is unfair that retirees do not get a locality raise because I live in a high cost of living area and our expenses are higher than in other areas.”

The reality is that when a federal employee’s annuity payment is calculated, the payment will probably be a little higher when the employee is working in an area with higher locality pay. Since that is where the job is located, there may not be an option for moving to a lower cost area.

Once a person has retired, there are more options available. Some federal employees have worked for several years in a higher paying job to obtain a higher retirement payment and then moved to an area with a lower cost of living after retirement.

So, unfair or not, federal employees who are retired and Social Security recipients do not receive a locality pay raise. That perk is only applicable to current federal employees.

Keeping the Terms Straight

The easiest way to sort through the bureaucratic thicket is to remember that a COLA is only applicable to federal retirees and Social Security recipients. A pay raise is only applicable to current federal employees.

And, finally, locality pay only applies to current federal employees.

This is an explanation of how the system works. We will leave it up to each reader to decide which group gets a better deal overall.

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