Federal Employees News Digest

Understanding CSRS and FERS Cost-of-Living Adjustments (COLAs) - Part II

While federal employees receive government-wide pay increases and locality pay adjustments in most years, federal annuitants receive cost-of-living adjustments or COLAs in most years. In the second of two columns explaining COLAs, this column explains COLAs for those annuitants covered by the Federal Employees Retirement System (FERS).

It is important to first present the definition of certain terms used in the computation of the FERS COLA. These terms are:

· Base quarter. The calendar quarter ending September 30th of any year.

· Consumer price index (CPI). The index published monthly by the Department of Labor that reflects changes in consumer prices for urban wage earners and clerical workers.

· Base quarter price index. The arithmetical mean of the CPI for the three months comprising the base quarter.

· COLA. An increase in an annuity based on the increase in the CPI between two consecutive base quarters.

· Effective date. COLAs are effective on December 1st of the year in which an annuitant becomes eligible.

· Annuity commencing date. The date an annuity first begins to accrue.
 
Eligibility for FERS COLAs

FERS COLAs do not apply to FERS annuitants who are under age 62 as of Dec. 1 of any year. There are exceptions to this minimum age eligibility requirement including FERS employees who retire under the special previsions for law enforcement officers, firefighters, or air traffic controllers and for spouses, former spouses and insurable interest individuals receiving FERS survivor annuities. Also, under FERS children survivor annuities are increased under CSRS COLA provisions rather than FERS COLA provisions.

Computation of COLAs

The amount of a 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, adjusted to the nearest 1/10 of one percent. The following example illustrates:

Generally, FERS COLAs are one percent less than the CSRS COLA as determined under the law. But if the CSRS COLA is between two and three percent, then the FERS COLA is two percent. If the CSRS COLA is two percent or less, then the FERS COLA matches the CSRS COLA.
The following table summarizes the above information:

In the above example in which the CSRS COLA is 2.8%, the FERS COLA is 2.0%.

FERS annuity – result of COLA increase
A FERS annuitant’s new gross monthly annuity reflecting the FERS COLA is obtained by multiplying the old FERS gross annuity by the COLA factor (one plus FERS COLA rate). The FERS gross monthly annuity is the annuity payable after the following adjustments (when applicable) have been made: (1) Reduction for survivor benefits; (2) reduction for alternative annuity; and (3) reduction for early retirement under MRA + 10 provisions. The following example illustrates.

Clara, age 64, retired from federal service under FERS in 2018. Clara is married and elected to give her spouse the maximum survivor benefit. Clara’s gross annuity and net annuity (often subtracting the cost to give a spousal survivor benefit) during 2018 was:

$40,000 (Gross FERS annuity)
($4,000) (Cost to give a maximum spousal survivor benefit                                                                           
$36,000 Net FERS annuity

The CSRS COLA was 2.8% for all annuitants on the retirement rolls as of Dec. 1, 2018. Since Clara is over age 62, she is eligible for the FERS COLA. But the FERS COLA (see above) is reduced to 2.0% since the CSRS COLA is more than 2% but less than 3%. Clara’s FERS gross annuity will therefore be adjusted (effective Dec. 1, 2018) as follows:

$40,000 times 1.02, or $40,800

Proration of First FERS COLA

There is no first COLA for those FERS employees who retire before age 62 and are not eligible for a COLA until they reach age 62. The following example illustrates:
Bill retired under FERS at age 59. He will become age 62 in September 2019. In January 2020, Bill will be eligible for his first (unprorated) FERS COLA. 

For those FERS employees retire after age 62, the amount of the annuitant’s first COLA is prorated. The proration is based on the number of months from the annuity’s commencement date to the effective date of the first COLA after the commencement date. The following example illustrates:

Joseph retired under FERS at age 63 on May 31, 2018. His effective date of retirement was June 1, 2018. A FERS COLA of 2.0% took effect on Dec.  1, 2018 for all FERS annuitants age 62 or older as of Dec. 1, 2018. Since Joseph was retired only six months (June through November 2018) before his first FERS COLA, Joseph will receive 6/12 of 2.0%, or 1.0%, of the 2019 FERS COLA. 

Edward A. Zurndorfer is a Certified Financial Planner, Chartered Life Underwriter, Chartered Financial Consultant and IRS Enrolled Agent in Silver Spring, MD.  Tax planning, Federal employee benefits, retirement and insurance consulting services offered through EZ Accounting and Financial Services, located at 833 Bromley Street Suite A, Silver Spring, MD 20902-3019 and telephone number 301-681-1652. 
 
 

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Contributors

Edward A. Zurndorfer Certified Financial Planner
Mike Causey Columnist
Tom Fox VP for Leadership and Innovation, Partnership for Public Service
Mathew B. Tully Legal Analyst

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