Thanks to rapidly rising inflation over the last couple of years, the 2023 cost of living adjustment (COLA) is the largest since 1981 at 8.7%. When will federal retirees see the increase in their annuity payments?
When is the COLA Announced, and When Do the Payments Begin?
The COLA is announced in October and takes effect in December each year. The increased annuity payments will hit in January in any given year. So using the 2023 COLA as an example, it was announced in October 2022, it took effect in December 2022, and the new payments start hitting federal retirees bank accounts in January 2023.
Will All Federal Retirees Get the Full COLA?
It is important to know how the COLA works and who gets it. Spoiler alert: recent federal retirees are going to be disappointed.
To receive the full COLA, you must have been receiving annuity payments for a full year. Federal retirees who have only been getting annuity payments for less than a year will get a prorated COLA. Prorated amounts are 1/12th for each month that a federal retiree has been receiving an annuity payment.
For the 2023 COLA, what this means is that you must have been receiving annuity payments since December 2021 at the latest in order to get the full 2023 COLA added to your annuity payments.
The video below offers more detail on how the prorated COLA works.
How is the COLA Calculated?
Here is how the COLA calculation works:
- Consumer Price Index (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 (2021).
- The average reading from the third quarter of the current year (2022) is compared to the figure from the third quarter of 2021.
- If the average CPI-W reading goes up in 2022, 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.
The COLA calculations are different for federal retirees under each of the main retirement systems for federal employees: the Federal Employees Retirement System (FERS) and the Civil Service Retirement System (CSRS).
How is the COLA Calculated for the Federal Employees Retirement System (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.
The above means that for the 2023 COLA, federal retirees under FERS will get a 7.7% COLA added to their annuity payments, assuming they are eligible to receive the full 2023 COLA.
The following also apply to the FERS COLA calculation:
- As noted previously, a retiree or survivor annuitant must have been in receipt of an annuity payment for a full year to get the full COLA.
- 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.
How is the COLA Calculated for the Civil Service Retirement System (CSRS)?
Federal retirees under CSRS get the full COLA unlike under FERS. 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.”
If you need help with your personal situation, check with your agency’s human resources office and/or a financial advisor who specializes in working with federal employees for assistance. The Office of Personnel Management’s retirement services can also provide assistance with retirement related matters.
The 2023 COLA and 2023 Federal Pay Raise Aren’t the Same
It’s important to remember also that the 8.7% 2023 COLA for federal retirees and the 2023 federal pay raise, an average of 4.6%, are not the same thing. The former applies only to retired federal employees and the pay raise applies only to current federal employees. The term “COLA” is often used interchangeably to describe the two but they are different as is the process of how they are determined. For more details, see What’s the Difference in the Annual COLA and Pay Raise?.