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.
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.
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 2023 COLA was recently announced. This applies to federal retirees and Social Security recipients, but not to current federal employees. At 8.7%, it will be the largest COLA since 1981.
The process for determining the COLA is automatic. It is not subject to politics or a result of the action of Congress or the president each year. 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).
How is the 2023 COLA Calculated?
This is a description from the Social Security Administration of how to compute the 2023 annual COLA:
The last year in which a COLA became effective was 2021. Therefore the law requires that we use the average CPI-W for the third quarter of 2021 as the base from which we measure the increase (if any) in the average CPI-W. The base average is 268.421, as shown in the table below.
Also shown in the table below, the average CPI-W for the third quarter of 2022 is 291.901. Because this average exceeds 268.421 by 8.7 percent, the COLA effective for December 2022 is 8.7 percent. The COLA calculation, with the result rounded to the nearest one-tenth of one percent, is:
(291.901 – 268.421) / 268.421 x 100 = 8.7 percent.
This is how the description above looks broken down in real numbers:
|CPI-W for 2021||CPI-W for 2022|
|Third quarter total||805.262||875.702|
|Average (rounded to the nearest 0.001)||268.421||291.901|
Which Federal Retirees Get the COLA?
In case the above description was not confusing enough for you, it gets even more complex: 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.
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.
Because there is such a high COLA in 2023, some federal employees who are near retirement may be tempted to go ahead and retire at the end of the year to take advantage of the big COLA for their annuity payments. This would be a mistake since they will not get the full 2023 COLA if they retire at the end of 2022. We explain why this is the case in more detail in this article, and the video below also provides an explanation.
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. President Biden did that this year when he sent a letter outlining an alternative pay plan for a 4.6% 2023 pay raise for current federal employees.
As of right now, it looks most likely that this will be the final amount of the 2023 federal pay raise, but it does not become official until the president issues an executive order finalizing it which usually occurs in mid to late December.
Who Comes Out Ahead?
So who gets more? Do federal 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. For 2023, it looks like federal retirees are going to be the clear winners. But again, the bottom line is one has nothing to do with the other.