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:

1. disability annuitants (except for those disability annuitants who are

   receiving 60 percent of their average salary do not receive COLAs)

2. employees who retired under the special provisions for law enforcement

   officers, firefighters or air traffic controllers; and

3. 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:

1. reduction for survivor benefits; and

2. 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.

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