With much discussion with respect to the high cost of living due to surging inflation, there is a question among many federal retirees as to the amount of the future cost-of-living adjustment (COLA) that CSRS and FERS annuitants and survivor annuitants will receive.
This column discusses what the COLA is, how the COLA is calculated, and how the COLA affects CSRS and FERS annuities, survivor annuities and other federal employee death benefits.
- SEE ALSO: 2024 Federal Retiree COLA Watch
First, it is important to define and explain certain terms:
• Base Quarter. The calendar quarter beginning July 1 and ending September 30 of any year.
• Consumer Price Index for Workers (CPI-W). The index published by the Bureau of Labor Statistics that reflects changes in consumer prices for urban wage earners and clerical workers. The CPI-W represents purchases of and what Americans pay for food and beverages, housing, apparel, transportation, medical care, recreation, education, communication and other goods and services.
• Base quarter price index. The arithmetical mean of the CPI-W for the three months comprising the base quarter – the months of July, August and September.
• Cost-of-living adjustment (COLA). An increase applied to an annuity based on the increase in the base quarter price index between consecutive base quarters.
• Effective date. COLAs are effective on December 1 of the year in which an annuitant becomes eligible. The increase in the annuity resulting from the COLA is reflected in the CSRS and FERS annuity checks payable in January following the effective date.
• Annuity commencing date. The date an annuity first begins to accrue.
How CSRS (and Social Security) COLAs Are Calculated
CSRS/CSRS Offset annuitants and Social Security disability and retirement benefit recipients receive the same COLA. The amount of the COLA is determined each year by the percent change in the base quarter price index from the previous year to the base quarter price index of the current year, adjusted to the nearest 1/10 of one percent. The 2022 COLA for CSRS /CSRS Offset annuitants and Social Security benefits recipients (that become effective Dec. 1, 2021) was 5.9 percent. The 5.9 percent was determined from the information in the table:
The percentage increase in the average CPI-W from the third calendar quarter of 2020 to the third calendar quarter of 2021 is calculated as:
(268.421-253.412)/253.412 times 100 percent adjusted to the nearest 0.1 percent equals
15.009/253.412 times 100 percent equals 5.9 percent
Therefore, the 2022 COLA equals 5.9 percent, effective Dec. 1, 2021.
A CSRS/CSRS Offset annuitant’s new gross monthly annuity (reflecting the COLA) is calculated by multiplying the previous year’s gross monthly annuity by the COLA factor (one plus COLA percentage). The new gross monthly CSRS annuity is the annuity payable before adjustments have been made (when applicable) for the following items:
(1) Reduction for the cost of a CSRS survivor annuity benefit;
(2) Reduction for early (pre-age 55) retirement;
(3) Reduction for unpaid deposit service performed before Oct. 1, 1982; and
(4) Reduction for unpaid redeposit for service ending prior to Mar. 1, 1991.
The new gross CSRS monthly annuity is always rounded to the nearest dollar. The new gross monthly annuity after a COLA is applied must reflect an increase of at least $1.00. The following example illustrates:
Example 1. Jim, a CSRS annuitant retired from federal service in 2014. During 2021, Jim’s monthly CSRS net annuity was $4,500 after a survivor annuity cost of $500 and an unpaid deposit of $100 was deducted. Jim’s CSRS gross monthly annuity during 2021 was therefore $4,500 plus $500 plus $100, or $5,100. Effective Dec. 1, 2021, Jim was eligible to receive the full 5.9 percent COLA which first showed up in his annuity check dated Jan. 1, 2022, calculated as follows:
Jim’s net CSRS annuity starting Jan. 1, 2022: $5,400 less $500 less $100 equals $4,800.
Note the that the annual COLA is also applied before withholdings are made for federal and state income taxes, and health, life, dental, vision and long-term care insurance premiums. Also, upon applying the COLA factor, the CSRS gross annuity is always rounded to the next lower dollar.
When Does a CSRS Annuitant Receive His or Her First COLA?
No matter at what age a CSRS/CSRS Offset employee retires from federal service, he or she is eligible for his or her first COLA that becomes effective the December 1 following the month of the same year the employee retires. However, the amount of the annuitant’s first year COLA will be prorated. The proration factor is determined based on the number of months, starting from the commencement date of the annuity until the effective date of the first COLA after the annuity commencement date. The following two examples illustrate:
Example 2. Judy is a CSRS annuitant who retired from federal service on Jan. 2,2021. The commencement date of Judy’s annuity was Jan. 3,2021 and she received her first CSRS annuity check dated Feb. 1, 2021. Judy therefore was eligible and received 11 CSRS monthly annuity checks between Jan. 3,2021 and Dec. 31, 2021. She received a CSRS annuity check on Feb. 1, Mar.1, Apr.1, May 1, June 1, July 1, Aug. 1, Sept. 1, Oct. 1, Nov. 1 and Dec. 1 – a total of 11 checks. Judy was therefore eligible to receive 11/12 of the 2022 COLA of 5.9 percent, or
11/12 of 5.9 percent (the 2022 COLA) equals 5.4 percent (Judy’s 2022 COLA amount)
Example 3. Jim is a CSRS annuitant who retired from federal service on May 31, 2021. His annuity starting date was therefore June 1,2021 and he received his first CSRS annuity check on July 1, 2021. Between June 1,2021 and Dec 31, 2021, Jim received a total of 6 CSRS annuity checks (July 1, Aug. 1, Sept. 1, Oct. 1, Nov. 1 and Dec. 1). Jim was therefore eligible to receive 6/12 of the 2022 COLA of 5.9 percent.
6/12 of 5.9 percent equals 2.9 percent (Jim’s 2022 COLA amount)
Amount of COLA for CSRS Survivor Annuitants (Including Spouses, Former Spouses, Insurable Interest)
A CSRS survivor annuity payable to a deceased annuitant’s surviving spouse, former spouse, to an insurable interest (an annuitant’s relative closer than a first cousin such as a child, sibling or a parent) commences on the day after the death of the annuitant. A CSRS survivor annuitant is eligible to receive all or some of the first-year COLA starting on January 1 following the year of death of the annuitant. The amount of the first-year survivor annuity COLA will depend on when the annuitant died after retiring from federal service. The following are the rules regarding how much of the first year COLA a survivor annuitant will receive:
• If the annuitant died any time after receiving his or her first COLA, then the CSRS survivor annuity first year COLA is not subject to proration. The following example illustrates:
Example 4. Jessica retired from federal service on Nov. 30, 2019. She received her first CSRS annuity check dated Jan. 1, 2020. She continued to receive CSRS annuity checks throughout 2020 and received a 2.0 percent COLA on her annuity, effective Dec.. 1, 2020. Jessica unexpectedly died in March 2021. Her surviving spouse, Howard, received his first CSRS survivor annuity check on Apr. 1, 2021. Howard received the full 5.9 percent COLA on his survivor annuity check, effective Dec. 1, 2021. The 5.9 percent COLA first appeared in Howard’s CSRS survivor annuity check on Jan. 1,2022.
• If the annuitant had not received his or her first COLA, or if a CSRS employee died while in federal service, then the survivor annuitant’s first COLA will be prorated based on the starting date of the survivor annuity, as illustrated in this example.
Example 5. Barry retired from federal service under CSRS on Feb. 27, 2021. He died on Aug. 5,2021 after receiving 5 CSRS annuity checks (Apr. 1, May 1., June 1, July 1, and Aug. 1). His wife Joan received her first CSRS survivor annuity check dated Sept. 1, 2021. Joan was entitled to a COLA on her CSRS survivor annuity effective Dec.. 1, 2021. However, the COLA (5.9 percent) was prorated as follows:
5.9 percent times 4 (survivor annuity checks – Sept 1., Oct.1, Nov.1, and Dec.1)/12
or 5.9 times 4/12 equals 1.9 percent (Joan’s 2022 survivor annuity COLA)
Starting with the 2023 COLA, Joan will be eligible for the full CSRS COLA.
Other Miscellaneous Provisions Regarding CSRS COLAs
1. While a CSRS annuitant is living, the same COLA that is applied to the CSRS annuity is applied to the survivor annuity.
2. The law does not provide for the annual COLA to be applied to the annuity purchased through the Voluntary Contribution Program (VCP).
3. A reemployed CSRS annuitant’s salary is offset by the amount of the CSRS annuity. When a COLA is applied to the annuity, the reemployed annuitant’s employing office must impose an additional salary offset in pay, effective from December 1st of the year of the COLA.
Children Survivor Annuities
Upon the death of a federal employee or a federal annuitant, eligible children of the employee or annuitant – those unmarried children under age 18 and those children who are between age 18 and 22 and full-time students are eligible to receive children survivor annuities. Children survivor annuities are increased by COLAs effective December 1 of every year and are payable starting in the January annuity check. However, unlike other annuitant COLAs, children COLAs are not subject to any proration for the first-year COLA. No matter at what point of the year an employee or an annuitant dies, a child survivor annuity is eligible to receive the full COLA effective the following December.
The COLA is based on the annuity payable before any deduction including the FEHB health insurance premium are deducted from the child survivor annuity. A CSRS COLA is also applied to the child survivor annuity received by a child of a deceased CSRS or FERS employee or annuitant.
How FERS COLAs Are Determined
While the same procedure in calculating the COLA, the change in the average CPI-W from the third quarter of one year to the average CPI-W of the third quarter in the following year for a FERS annuitant as for a CSRS annuitant, there are two differences:
(1) Depending on the amount of the CSRS COLA, the FERS COLA may be the same or less; and
(2) With some exceptions, FERS employees who retire before age 62 do not receive heir first COLA until the year after they become age 62.
With respect to difference in the amount of the CSRS COLA and the FERS COLA, the following table summarizes the FERS COLA in relation to the CSRS COLA:
The following illustrate FERS COLAs:
For the year 2021, the CSRS COLA was 2.0 percent. FERS annuitants over age 62 during 2021 received a 2.0 percent COLA.
For the year 2022, the CSRS COLA was 5.9 percent. FERS annuitants over age 62 received a 4.9 percent COLA.
Note: There is currently legislation in Congress that would make the FERS COLA and the CSRS COLA equal, no matter the amount of the CSRS COLA.
Similar, but not identical to the CSRS gross annuity, the FERS COLA is applied to the FERS gross annuity before the following deductions are applied to the FERS gross annuity:
(1) Reduction for a FERS survivor annuity; and
(2) Reduction resulting for an immediate or postponed “MRA+10” or “MRA+20” retirement provision.
The other difference is that a FERS employee who retires before age 62 under an immediate retirement (regular or “MRA+10” or “MRA+20”) or leaves federal service and is eligible for a deferred retirement is not eligible to receive their first FERS COLA until the year after they become age 62. There are some exceptions to this rule including the following:
• Disability annuitants, including military reserve technicians who are medically disqualified from military service of the rank required to hold their positions. But disability annuitants who are receiving 60 percent of their average salary, starting the second year of their FERS disability retirement through age 61, do not receive COLAs.
• Military reserve technicians whose separations from technician service resulted from loss of military membership or rank due to a disability after attaining age 50 and completing 25 years of service.
• Employees who retire under the special provisions federal employment classification. These employees include law enforcement officers, firefighters and air traffic controllers.
• Surviving spouses and former spouses and “insurable interest” individuals receiving survivor annuities.
FERS annuitants receive their first COLA on January 1st following the year in which the annuitant becomes age 62. The first year COLA is not prorated according to the number of months between the month that a FERS annuitant becomes age 62 and the following December 1 when the FERS COLA becomes effective. The following examples illustrate:
Example 6. Frank retired from federal service in 2019 when he was 60 years old. Frank’s FERS annuity during 2019, 2020 and 2021 did not receive any COLAs. Frank became age 62 in July 2021. Frank’s FERS annuity received its first COLA (4.9 percent) on Jan. 1, 2022. The 4.9 percent COLA was not prorated due to the fact that Frank became age 62 in July 2021.
Example 7. Carol retired from federal service under FERS on Dec. 31,2020 at age 63 with 20 years of federal service. Her starting FERS annuity was $19,800 which is the net annuity after subtracting the survivor annuity cost of $2,200 for her husband. Carol’s gross FERS annuity was therefore $19,800 plus $2,200 or $22,000 per year during 2021. On Jan. 1,2022 Carol received her first COLA of 4.9 percent. Her FERS gross annuity for 2022 increased by $22,000 times 4.9 percent, or to $23,078. Her 2022 net FERS annuity, after subtracting the cost of the survivor annuity is:
$23,078- $2,200 equals $20,878 (Carol’s net annuity during 2022)
FERS employees who are “Trans” FERS employees, having transferred from CSRS to FERS during one of the two FERS “open seasons” in 1987-88 and 1998, are eligible to receive both a CSRS and FERS annuity when they retire from federal service under FERS. The CSRS annuity component of their retirement is subject to the CSRS annuity COLA rules. CSRS COLA rules do not require a “Trans” FERS to be age 62 in order to receive a COLA on their CSRS annuity component. But a “Trans” FERS employee who retires before age 62 will have to wait until January 1 of the year following the year they become age 62 to receive a COLA on the FERS annuity component of their retirement.