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Articles | Guide to Federal Retiree COLAs: What Are They and How Are They Calculated?
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Guide to Federal Retiree COLAs:
What Are They and How Are They Calculated?
Edward A. Zurndorfer, CFP
Each January, all Civil Service Retirement System (CSRS) annuitants and Federal
Employees Retirement System (FERS) annuitants age 62 and older receive a cost of
living adjustment or COLA.
This article discusses federal retiree COLAs and how they are computed.
Before discussing COLAs, it is important to define certain terms:
- Base quarter. The calendar quarter ending September 30 for
any given year
- Consumer Price Index for Workers (CPI-W). The index
published monthly by the Bureau of Labor Statistics that reflects changes in
consumer prices for urban wage earners and clerical workers.
- Base quarter price index. The arithmetical mean of the
CPI-W for the three months comprising the base quarter - the months are July,
August and September
- Cost of living adjustment. An increase in an annuity based
on the increase in the base quarter price index between consecutive base
quarters.
- Effective date. Cost-of-living adjustments are effective
on December 1 of the year in which an annuitant becomes eligible. Increases are
first reflected in annuity checks payable in January following the effective
date.
- Annuity commencing date. The date an annuity first begins
to accrue.
CSRS Annuitants
The amount of a CSRS COLA is determined by the percent change in the base
quarter price index from the previous year to the year in which the COLA is to
become effective and adjusted to the nearest 1/10 of 1 percent. Consider this
example which illustrates how the 2009 COLA was calculated:
Year
Base Quarter Price
Index
2007
203.596
2008
215.495
The percentage increase in the average CPI-W from the third calendar quarter
of 2007 to the third quarter of 2008 is calculated as follows:
(215.495 - 203.596)/203.596 times 100%= 5.8%
COLA rate = 5.8%, effective Dec. 1, 2008
An individual's new gross monthly annuity reflecting the COLA
is calculated by multiplying the previous year's gross monthly annuity by the
COLA factor (1 plus the COLA rate). The new gross monthly annuity is the annuity
payable after adjustments have been made (when applicable) for some or all of
the following: (1) reduction for survivor benefits; (2) reduction for early
retirement; (3) reduction for unpaid deposit service performed before Oct. 1,
1982; and (4) reduction for unpaid redeposit for service ending prior to Oct. 1,
1990.
The new gross monthly annuity is always rounded to the nearest dollar. But
the new gross monthly annuity after a COLA must reflect an increase of at least
$1.00. Consider the following example.
Jim retired from federal service on Oct. 31, 2007 and received his first
CSRS annuity check of $4,300 on Dec. 1, 2007. The $4,300 is the monthly gross
amount after a survivor annuity cost of $500 was deducted. Effective Dec. 1,
2008, Jim is eligible to receive the full 5.8 percent COLA which shows up in his
annuity check dated Jan. 1, 2009, calculated as follows:
Gross monthly annuity before
COLA:
$4,300
Multiply by COLA factor (1 +
.058)
x 1.058
Gross monthly annuity after
COLA
$4,549
A CSRS annuitant receives his or her first COLA effective January 1 following
the year in which the annuitant retires. But the amount of an annuitant's first
COLA is prorated. The proration is based on the number of months from the
commencement of the annuity to the effective date of the first COLA after the
commencement date.
In general, annuitants receive one-twelfth of the applicable COLA for each
full month that they are in receipt of an annuity before December 1 of any year.
In other words, the first COLA is based number of months the individual was an
annuitant on the first day of month between December 1st of the previous year
and November 30th of the year in which the employee retired. Consider the
following examples.
Example 1. Judy is a CSRS annuitant who retired from federal service on
Jan. 3, 2009. As of Dec. 1, 2009, Judy would be an annuitant on the 1st day of
the month between January 3, 2009 and Nov 30, 2009 for 10 months. Judy is
therefore eligible to receive 10/12 of the COLA that takes effect with the Jan.
1, 2010 annuity payment.
Example 2. Jim is a CSRS employee who intends to retire from federal
service on July 31, 2009. His annuity commencement date is August 1, 2009.
As of Dec. 1, 2009, Jim will be an annuitant for four full months - August,
September, October and November. Jim is therefore eligible to receive 4/12 of
the COLA that takes effect with the Jan. 1, 2010 annuity
payment.
CSRS Survivor Annuitants: Spouse, Former Spouse or Insurable
Interest
An annuity payable to an annuitant's survivor normally commences on the day
after death. A survivor annuitant will receive all or some of the COLA following
the year of death, depending on when the annuitant died after retiring from
federal service. The following are the rules regarding how much of the first
COLA a survivor annuitant will receive.
- If the annuitant received his or her first COLA, the survivor annuity is not
subject to proration. Here is an example.
Joseph retired from federal service on Nov. 30, 2007. He received his
first CSRS annuity check dated Jan. 1, 2008 and continued to receive his monthly
annuity payments throughout 2008. He also received a 5.8 percent COLA effective
Jan. 1, 2009. Joseph unexpectedly died on Feb. 20, 2009. His wife Serena is
entitled to a survivor annuity with survivor annuity payments commencing March
1, 2009. In January 2010, Serena will be entitled to a full COLA on her CSRS
survivor annuity.
- If the annuitant had not received his or her first COLA, the survivor's
first COLA will be prorated, based on the starting date of the retiree's
annuity. Here is an example.
Bruce retired from federal service on June 1, 2008. He died on July 14,
2008 after receiving one CSRS annuity check dated July 1, 2009. His wife Joan is
entitled to a CSRS survivor annuity with the first survivor annuity check dated
Aug. 1, 2008. While Joan is entitled to a COLA in January 2009, her COLA will be
prorated. The amount of proration and resulting COLA is as follows:
Number of CSRS annuity and survivor annuity payments between
July 1 and Nov. 30, 2008
= 5 (July, August, September, October and November)/12
times 2009 COLA
= 5/12 times 5.8%
= 2.42% = resulting first year survivor annuity COLA
- The proration rules also apply to the first COLA paid to the survivor of an
employee who died in service.
Children survivor annuities are increased by COLAs effective December 1 and
are payable in the January annuity check. But unlike other annuitants' COLAs,
children's COLAs are not subject to proration.
Some other miscellaneous provisions regarding COLAs for CSRS
annuitants:
- The law does not provide for COLAs for additional annuities purchased at
retirement through the Voluntary Contribution Program (VCP).
- A reemployed annuitant's salary is offset by the amount of an annuity. When
a COLA is applied to the annuity, the employing office must impose an additional
salary offset. The additional offset in pay is effective from December 1 of the
year of the COLA.
FERS Annuitants
FERS COLAs do not apply to annuitants who are under age 62 as of December 1
of any year with the following exceptions:
- disability annuitants (except for those disability annuitants who are
receiving 60 percent of their average salary do not receive COLAs)
- employees who retired under the special provisions for law enforcement
officers, firefighters or air traffic controllers; and
- spouse, former spouse and insurable interest survivor annuitants. Also,
children of deceased FERS employees and annuitants who are receiving children
survivor annuities receive full COLAs annually.
The following table summarizes the FERS COLAs in relation to the CSRS
COLA.
CSRS
COLA FERS
COLA
Up
to 2.0% Same as CSRS
COLA
2.0%
to
3.0% 2.0%
Above
3.0% CSRS COLA minus 1.0%
Similar to -- but not identical to -- the CSRS gross monthly annuity, the new
gross FERS monthly annuity is the annuity payable after some or all of the
following adjustments are made:
- reduction for survivor benefits; and
- reduction for early retirement under "MRA + 10" or postponed retirement, and
early deferred provisions.
Consider this example.
Joan, age 63, retired from federal service on Dec. 31, 2007 at age 62
with 20 years of federal service. Her starting FERS annuity was $20,000, which
is the net annuity after subtracting a full survivor annuity cost of $2,000 for
her husband. Joan's gross FERS annuity before subtracting the cost of the
survivor annuity was $22,000. In January 2009, Joan received her first COLA of
4.8 percent, meaning her FERS annuity will increase by $20,000 x 4.8 percent, or
$960 a year. Her 2009 FERS annuity will then be $20,960.
As indicated above, with some exceptions FERS annuitants are not eligible for
their first COLA until the December following the month they reach age 62. For
most FERS annuitants who retire before they reach age 62, they will have to wait
until the January following the month and year they reach age 62 in order to
receive their first FERS annuity COLA. But the first COLA will not be prorated
according to the number of months they were age 62 in the year that they became
62. Here is an example.
Frank retired under FERS in 2006 when he was age 59. He will become age
62 in July 2009. In January 2010, Frank will be eligible to receive a full
(non-prorated) FERS COLA.
Certain FERS annuitants are entitled to a CSRS annuity, in addition to a FERS
annuity. Most of these annuitants transferred FERS from CSRS in 1987 or 1998
with at least five years of service under CSRS. They are commonly called "Trans"
FERS.
The CSRS portion of a "Trans" FERS annuitant's annuity is subject to the CSRS
COLA rules rather than the FERS COLA rules. CSRS COLA rules also do not require
a "Trans" FERS annuitant to be age 62 in order to receive a COLA on their CSRS
annuity component. Therefore, the CSRS portion of their annuity may increase
even though the FERS annuity does not.
Posted: 03/26/2009
About the Author
Edward A. Zurndorfer is a Certified Financial Planner and Enrolled Agent
in Silver Spring, Maryland. He is also a registered representative with
Multi-Financial Securities Corporation (Branch A9X), member FINRA/SIPC, also
located in Silver Spring, Maryland
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