Guide to Federal Retiree COLAs: What Are They and How Are They Calculated?

Nearly every January, all Civil Service Retirement System (CSRS) and Federal Employees Retirement System (FERS) annuitants age 62 and older receive a cost-of-living adjustment or COLA on their CSRS and FERS annuities. This column discusses what the COLA is, how the COLA is calculated, and how it affects CSRS and FERS annuities, survivor annuities, and other federal employee death benefits.

It is important to first define certain terms:

•  Base Quarter. The calendar quarter beginning July 1 and 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 of July, August and September,
• Cost-of-living adjustment (COLA). An increase in an annuity based on the increase in the base quarter price index between consecutive base quarters,
• Effective date. COLAs are effective on December 1^st of the year in which an annuitant becomes eligible. Increases are first reflected in annuity checks payable in January following the effective date, and
• Annuity commencing date. The date an annuity first begins to accrue.

How CSRS COLAS Are Determined

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 nearest 1/10 of 1 percent. The 2018 COLA for CSRS annuitants that became  effective Dec. 1, 2017 was 2.0 percent. The 2.0 COLA was calculated as follows:

The percentage increase in the average CPI-W from the third calendar quarter of 2016 to the third calendar quarter of 2017 is calculated as:

(239.668 – 235.057)/235.057 x 100% = 1.96%, adjusted to the nearest .1 percent = 2.0%

 Therefore, the COLA equals 2.0 percent, which was effective Dec. 1, 2017.

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 (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 March 1, 1991.

The new gross 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, as the following example illustrates:

Jim retired from Federal service under CSRS on Nov. 30, 2016. He received his first CSRS monthly annuity check of $4,300 on Jan. 1, 2017. The $4,300 is the monthly net annuity after a survivor annuity cost of $500 was deducted. Jim’s gross monthly annuity is therefore $4,800. Effective Dec. 1, 2017, Jim was eligible to receive the full 2.0 COLA which showed up in his annuity check dated Jan. 1, 2018, calculated as follows:

Gross monthly annuity before COLA                         $4,800

Times: COLA factor (1 + .02)                                  x 1.02

Gross monthly annuity effective Jan. 1, 2018             $4,896

Net monthly annuity effective Jan. 1, 2018               $4,396

Note that the COLA is applied before withholdings are made for federal and state income taxes, health, life, dental, vision and long term care insurance premiums. Also, upon applying the COLA factor the CSRS gross monthly annuity is always rounded to the next lower dollar.

When Does a CSRS Annuitant Receive the First COLA?

A CSRS annuitant receives his or her first COLA effective Jan. 1  following the year in which the annuitant retires. However, since the annuitant retires after Dec. 1 preceding the year the annuitant retires, 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. Here are two examples that illustrate.

Example 1. Judy is a CSRS annuitant who retired from Federal service on Jan. 3, 2017. As of Dec. 1, 2017, Judy was an annuitant for the period Dec.1, 2016 through Nov. 30, 2017 as of the first day of the month for ten months. That is, Feb^. 1 through November 30^th. Judy was therefore eligible to receive 10/12 of the COLA that became effective Dec. 1, 2017. That was 2.0 percent. Judy’s COLA that took effect on Jan. 1, 2018 was:

10/12 x 2.0% = 1.7%

 Example 2. Jim is a CSRS annuitant who retired from Federal service on May 31, 2017. His annuity commencement date was therefore June 1, 2017. As of Dec. 1, 2017, Jim was an annuitant on the first day of the month for 6 months, June 1 though Nov. 30. Jim was therefore eligible to receive 6/12 of the COLA that became effective Dec. 1, 2017. That was 2.0 percent. Jim’s COLA that took effect on Jan. 1, 2018 was:

6/12 x 2.0% = 1.0%

What Do CSRS Survivor Annuitants – Spouses, Former Spouses, or an Insurable Interest – Receive in COLAs?

A survivor annuity payable to an annuitant’s survivor, a spouse, a former spouse, or an insurable interest, commences on the day after the death of the annuitant. A survivor annuitant will receive all or some of the COLA following the year of death depending on when the annuitant dies 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, then the survivor annuity is not subject to proration, as illustrated in this example:

Joseph retired from Federal service on Nov. 30, 2015. He received his first CSRS annuity check dated Jan. 1, 2016 and continued to receive his monthly annuity payments throughout 2016. He also received a 0.3 percent COLA effective Dec. 1, 2016 that showed up in his annuity check dated Jan. 1, 2017. Joseph unexpectedly died on Feb. 20, 2017. His wife, Serena, received a full 2.0 percent COLA on her survivor CSRS annuity on Jan. 1, 2018.

 • If the annuitant had not received his or her first COLA, or if a CSRS employee died while in service, then the survivor annuity’s first COLA will be prorated, based on the starting date of the annuity, as illustrated in this example:

Bruce retired from Federal service under CSRS on June 1, 2017. He died on July 14, 2017 after receiving one CSRS annuity check dated July 1, 2017. His wife Joan is entitled to a CSRS survivor annuity with the first survivor annuity check dated Aug. 1, 2017. While Joan was entitled to a COLA effective Jan. 1, 2018, her COLA was prorated as follows:

2.0 percent (full COLA) times the number of months as a survivor annuitant through Nov. 30,.2017 divided by 12.

Because Bruce died on July 14, 2017, Joan’s commencing date for her survivor annuity is July 15, 2017.

 Joan’s prorated COLA is therefore:

2.00 percent x 5 (July, August, September, October, November)/12

= 2.0 percent x 5/12 = 0.83 percent

Some Other Miscellaneous Provisions Regarding COLAs for CSRS Annuitants

1.  While a CSRS annuitant is living the potential CSRS survivor annuity benefit receives the same COLA increases the annuitant receives
2. The law does not provide for COLAs for an additional annuity purchased through the Voluntary Contribution Program (VCP).
3.  A reemployed (rehired) 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^st of the year of the COLA.

Children Survivor Annuities

Children’s annuities are increased by COLA’s, effective December 1^st, and are payable in the January annuity check. However, unlike other annuitants COLAs, children COLAs are not subject to proration.

The COLA is based on the annuity payable before any deductions are made, such as health benefits.

How FERS COLAs Are Determined

While the same procedure in calculating the COLA from the change in the average CPI-W from the third quarter of one year to the next year’s third quarter average CPI-W, the amount of the COLA and the timing of the COLA for FERS annuitants differs. In particular, FERS COLAs do not apply to annuitants who are under age 62 as of December 1^st of any year with the following exceptions:

1. Disability annuitants, including military reserve technicians who are medically disqualified from military service or the rank required to hold their positions. But disability annuitants who are receiving 60 percent of their average salary do not receive COLAs.
2. Military reserve technicians whose separation from technician service resulted from loss of military membership or rank on account of disability after attaining age 50 and completing 25 years of service.
3. Employees who retire under the special provisions for law enforcement officers, firefighters or air traffic controllers.
4. Spouses, former spouses and insurable interest individuals who are receiving survivor annuities.

Also, under FERS children survivor annuities are increased under CSRS COLAs rather than under FERS COLAs. This assumes the CSRS COLA and the FERS COLA are different that depending on the amount of the CPI-W, may be the case in some years as shown in the table below.

FERS COLA vs. CSRS COLA

The following table summarizes the FERS COLA in relation to the CSRS COLA:

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: (1) Reduction for survivor benefits; and (2) reduction for early retirement under the “MRA + 10” or “postponed” retirement provisions are made.

FERS annuitants receive their first COLA on January 1^st following the year in which the annuitant becomes age 62 or retires. The following example illustrates:

Joan, age 64, retired from Federal service under FERS on Dec. 31, 2016 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. Joan’s gross FERS annuity before subtracting the cost of the survivor annuity was $22,000. On Jan.1,  2018 Joan received her first COLA of 2.0 percent. This means that Joan’s FERS annuity will increase by $22,000 times 2.0 percent, or $440 per year. Her 2018 FERS net annuity, after subtracting the cost of the survivor annuity, is therefore:

$22,440 minus $2,200 = $20,240

As discussed above, with some exceptions FERS annuitants are not eligible for their first COLA until the December following the month they reach age 62. For many FERS annuitants who retire before they reach age 62, they will have to wait until January following the month and year they reach age 62 in order to get 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 they became age 62. Here is an example:

Frank retired under FERS in 2015 when he was age 60. He became age 62 in July 2017. In January 2018, Frank received the full 2.0 percent COLA on his FERS annuity.

FERS employees who are “Trans” FERS employees, having transferred from CSRS to FERS in 1987 – 88, or 1998, during one of two FERS “open season” with at least five years of CRSR service, receive both a CSRS annuity and a FERS annuity when they retire. The CSRS annuity of their retirement is subject to the CSRS annuity rules. CSRS COLA rules also do not require a “Trans” FERS annuitant to be age 62 to receive a COLA on their CSRS annuity component. Therefore, a “Trans” FERS employee who retires before age 62 will see an increase in his or her CSRS annuity component via a COLA, even though the FERS annuity component is not subject to a COLA.