The method of calculating a cost of living adjustment (COLA) each year does not change. It is a complex calculation involving an index from the Bureau of Labor Statistics (CPI-W) index. The CPI-W is the Consumer Price Index for Urban Wage Earners and Clerical Workers. As explained below, the amount of the COLA will vary for individual federal retirees.
Largest COLA Increase in Four Decades Possible
Based on the new CPI data from June, Mary Johnson, Social Security analyst for the Senior Citizen League, projects Social Security benefits could increase 6.1% in 2022. This is about five times the 1.3% COLA increase in January 2021.
If current inflationary trends continue through September, the result could be the largest annual cost-of-living increase in Social Security benefits since 1983.
Although a very small group, an increase that meets this projection may sound familiar for any reader who was receiving retirement benefits with a COLA under the Carter administration when inflation was raging.
Some readers have asked us if the method of calculating the COLA for 2022 has changed for FERS employees. When reading that one current projection for the 2022 COLA would be 6.1%, they were hoping federal retirees under the FERS program would get the full adjustment.
Here is how the COLA calculation works:
- CPI-W readings are taken from the third quarter (July – September) of the current year.
- These data are compared to the average CPI-W reading from the third quarter of the previous year (2020).
- The average reading from the third quarter of the current year (2021) is compared to the figure from the third quarter of 2020.
- If the average CPI-W reading goes up in 2021, then the difference, rounded to the nearest 0.1%, is what beneficiaries will receive as an increase in 2022.
- If the figure is lower— indicating deflation—no adjustment is made. That happened several times under the Obama administration.
When Does Next Year’s COLA Become Available?
The information on the percentage increase of the 2022 COLA will not be available until October. The first payment of the new COLA amount will be in January 2022.
Here is what all of this means for the 2022 COLA based on the June 2021 data.
The CPI-W figure for June 2021 was 266.412. This is 5.13 percent higher than the average CPI-W for the third quarter of 2020 when the average was 253.412 (1982-84 = 100).
The annual COLA percentage determined by comparing the change in the CPI-W from year to year, based on the average of the third-quarter months of July, August, and September. October is when the data from September are released. This is why we will not know the amount of the 2022 COLA increase until October. Once these data becomes available, the 2022 COLA calculation can be determined.
It Gets More Complex
While the COLA calculation sounds complex at this point, this is actually just the beginning of the complexity.
Coming up with a system that applies to all federal employees and retirees is not simple or easy. The systems have changed over time and there are always interest groups seeking more benefits for those they represent. As these benefits are thrown into the mix, the calculation complexity increases.
The result is a system that has to fit all of the special programs created over time. Agencies often have a person who is an expert in at least some of these programs. If you are fortunate to have such a person in your agency, that will be helpful in finding out more information about your COLA for next year.
For many readers, they wait until they get their first annuity payment in the next year and they hope it is calculated correctly. That is the quickest and easiest approach. Of course, if it is not calculated correctly, you may not ever know. Hopefully, your servicing human resources office will be able to provide employees with the correct information.
If you are still reading this article to learn more about what your COLA is likely to be next year, trudge on.
Calculating the COLA for FERS
- 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 get the full COLA, a retiree or survivor annuitant must have been in receipt of payment for a full year.
- If a person has not received the payment for a full year, the increase is prorated under both plans. Prorated accounts receive one-twelfth of the increase for each month they received benefits. Cost-of-Living Adjustments were first prorated in April 1982.
- Adjustments to benefits for children are never prorated.
- 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.
Calculating the COLA for CSRS Employees
For Civil Service Retirement System (CSRS) benefits, the percentage increase is applied to your monthly benefit amount before any deductions are withheld. The payment is rounded down to the next whole dollar.
Of course, there are some exceptions to these calculations. As noted by the Office of Personnel Management (OPM): “A benefit will not be increased if it would cause the annuitant to receive payments in excess of any cap amount specified by law.”
For those who were asking how they can determine their COLA for 2022, your answer will depend on several variables, including which retirement system applies to you, how many months you started to receive your retirement payment in the past year, whether the FERS special benefits apply to you, your age, etc.