What Are COLAs for Federal Retirees, and How Are They Calculated?

Many federal retirees are uncertain about the size of the cost-of-living adjustment (COLA) that CSRS (Civil Service Retirement System), FERS (Federal Employees Retirement System), and survivor annuitants will receive in 2023 after hearing a lot of debate about the high cost of living due to soaring inflation in 2022.

This article describes the COLA, how it is calculated, and how it impacts CSRS and FERS annuities, survivor annuities, and other death benefits for federal employees.

It is crucial to define and clarify a few terms first:

The primary quarter is any year’s third calendar quarter, from July 1 to September 30.

• Workers’ Consumer Price Index (CPI-W): The index represents changes in consumer prices of urban wage earners and office workers and is released by the Bureau of Labor Statistics. The CPI-W measures American spending on various goods and services, including housing, clothing, transportation, healthcare, recreation, education, and communication.
• Index of base quarter prices. The CPI-mathematical Ws mean for the three months that make up the base quarter—July, August, and September.
• Cost-of-living modifications (COLA). A rise in an annuity’s value is based on the base quarter market prices between two base quarters.
• The start date. The first day of December in the year that an annuitant becomes qualified is when COLAs go into effect. 
• Annuity beginning date. The CSRS and FERS annuity checks due in January after the effective date reflect the increase in the payout resulting from the COLA. On the first day, annuities start to grow.

How to Calculate COLAs for CSRS and Social Security

The same COLA is given to recipients of Social Security retirement and disability benefits and CSRS/CSRS Offset annuitants. The percentage change in the base quarterly price index from the prior year to the base quarterly price index of the present year, calculated to the closest 1/10 of a percent, is used to calculate the COLA each year. The Social Security benefit recipients and CSRS/CSRS Offset annuitants’ 2022 COLA, which took effect on December 1, 2021, was 5.9%. The data in the table were used to calculate the 5.9%, which is explained below.

The percentage rise in the average CPI-W from the third quarter of 2020 to the third quarter of 2021 is calculated as follows, rounded to the closest hundredth:

(268.421-253.412)/253.412 times 100%

5.9% is equivalent to 0.1% multiplied by 15.009/253.412 times 100%

How to Calculate FERS COLAs

There are two distinctions between calculating the COLA for a FERS annuitant and a CSRS annuitant, which is the difference between the mean CPI-W from the third period of one year through the third quarter of the following year.

(1) With few exemptions, FERS workers who retire before age 62 may not get their first COLA until the year following they become age 62.

(2) The amount of the FERS COLA could be the same as the CSRS COLA or less.

The following table describes the FERS COLA in connection to the CSRS COLA about the difference in the amounts of the CSRS COLA as well as the FERS COLA.

FERS COLAs are illustrated by the following:

The CSRS COLA equaled 2.0% for the year 2021. FERS annuitants over the age of 62 in 2021 received a COLA of 2.0%.

The CSRS COLA for the year 2022 was 5.9%. FERS annuitants over 62 years old received a COLA of 4.9%.

The FERS COLA is added to the FERS gross pension before the accompanying deductions are made to a FERS gross annuity, making it similar to the CSRS net annuity but not the same.

(1) Decrease for a FERS survivors annuity; and

(2) Reduction arising from an “MRA+10” or “MRA+20” retirement provision that is either immediate or delayed.

Another distinction is that a FERS worker who departs from federal employment and qualifies for a delayed retirement but retires before age 62 under an instant retirement (regular or “MRA+10” or “MRA+20”) is not eligible to earn their first FERS COLA until a year after they turn 62. 

On January 1st of the year, after the annuitant turns 62, FERS annuitants earn their first COLA. The amount of months between the month a FERS annuitant turns 62 and the subsequent December 1 once the FERS COLA takes effect does not affect how much of the first year COLA is prorated.

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Investment advisory services are offered through BWM Advisory, LLC (BWM). BWM is registered as an Investment Advisor located in Scottsdale, Arizona, and only conducts business in states where it is properly licensed, notice has been filed, or is excluded from notice filing requirements. This information is not a complete analysis of the topic(s) discussed, is general in nature, and is not personalized investment advice. Nothing in this article is intended to be investment advice. There are risks involved with investing which may include (but are not limited to) market fluctuations and possible loss of principal value. Carefully consider the risks and possible consequences involved prior to making any investment decision. You should consult a professional tax or investment advisor regarding tax and investment implications before taking any investment actions or implementing any investment strategies.