There is often confusion between a Cost of Living Adjustment (COLA) and a pay raise. While they both provide an increase in payments, whether annuity or income, they are very different. So, what is a COLA and what is a pay raise?
Cost of Living Adjustments are effective December 1st and payable to retirees each January. They are a measure of inflation and are paid automatically. COLA’s are based on the change in the Consumer Price Index (CPI) from the third calendar quarter of the year that just ended to the third calendar quarter of the preceding year. The adjustment appears in the January payment on the first business day of the month.
Retirees under CSRS get the full COLA regardless of age. The increased percentage is applied to monthly benefits before any deductions and rounded down to the nearest dollar amount.
If you retired under FERS, the COLA is not paid until age 62, unless you’re a disability retiree, receive survivor benefits, or retired under other special provisions. Also, if under FERS and have a CSRS component, that part is subject to the CSRS COLA. The calculation is trickier for FERS retirees. Unlike the CSRS COLA where retirees receive the full amount, FERS retirees receive a percentage. If the COLA is above three percent, FERS retirees receive the CPI amount minus one percentage point. If the COLA falls between two and three percent, they only get two percent. When the increase is two percent or less, the COLA is equal to that amount.
COLA’s are prorated for those who retired during the calendar year before the COLA is paid, depending on how many months they were retired that year.
Raises are for active employees. They are linked to labor market conditions, not cost of living. Raises are determined during the annual Congressional budget cycle and they start with recommendations from the White House. Annual raises are paid regardless of whether the employee had worked the entire previous year. The formula for calculating raises is much more complicated. The starting point is a measure of private sector wage growth, called employment cost index.
There is a big difference between these two. COLA’s are not raises. If you, or someone you know, is facing an early retirement because you can no longer perform your job duties, call Harris Federal Law Firm now. We can help you through the process and explain how COLA’s will affect you. Give us a call at 877-226-2623 or fill out this inquiry form.