Because of how important the annual Social Security payment is for Social Security recipients and federal employee retirees, one of the most anticipated financial events of the year is the October announcement for the annual cost-of-living adjustment (COLA). The annual adjustment is first reflected in the January payment to retirees.
The annual COLA is essentially the annual “raise” for retirees. It’s not a raise in the usual sense as it is designed to keep up with the rate of inflation for the increasing cost of goods and services. But, while it is not a raise in the usual sense, it still means more money for retirees and can play an important part in their finances.
COLA Increases by Year Including 2021
The 2021 COLA adjustment will be 1.3%. This increase is one of the smallest increases, although there have been years when there was no increase at all.
Here are the recent COLA increases by year:
- 2021: 1.3%
- 2020: 1.6%
- 2019: 2.8%
- 2018: 2.0%
- 2017: 0.3%
- 2016: 0%
- 2015: 1.7%
- 2014: 1.5%
- 2013: 1.7%
- 2012: 3.6%
- 2011: 0%
- 2010: 0%
- 2009: 5.8%
How Next Year’s COLA is Calculated
The COLA that will arrive in payments for Social Security recipients and federal retirees in January 2021 is determined by comparing the change in the consumer price index (CPI-W) from year to year—based on the average of the third-quarter months of July, August, and September.
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, education, communication, among others. The annual increase is calculated by the Bureau of Labor Statistics.
According to the Social Security Administration, based on the increase of average wages, the maximum amount of earnings subject to the Social Security tax (taxable maximum) will increase to $142,800 from $137,700. This increase will also go into effect in January.
Calculating COLAs is Different for FERS and CSRS
The 2021 COLA will be 1.3% for Civil Service Retirement System (CSRS) annuities and Social Security benefits. It will also be 1.3% for Federal Employees Retirement System (FERS) retirees.
Calculating government benefits always seems complicated. That is because it is complicated. This is just one example.
- 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 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.
The Impact of a COLA on a Federal Pay Raise
One question that comes up every year from readers is this: “I am a current federal employee. Will I also receive the same pay raise?”
It is unlikely current federal employees will receive the same pay raise amount as the 2021 COLA. The annual cost-of-living-adjustment (COLA) is not the same as the pay raise for the current federal workforce.
The amount of the pay raise for current federal employees will be determined later this year.
While the COLA may have an indirect impact on the final amount of any pay raise, the two figures are applicable to different groups and the decision on any amount is determined in different ways.
When locality pay is added in to any annual pay raise that will be effective in 2021, some current federal employees may receive a 1.3% raise depending on their geographic location. That is a coincidence. The COLA has no direct impact on the next federal employee pay raise.