With the specter of higher pension contribution rates in a recently House-passed bill, employees are looking forward to lower take-home pay in exchange for the same benefits. As a result, many who are eligible to retire are seriously considering doing that.
If you are one of them, there’s one piece of good news: Congress hasn’t yet managed to alter the law that provides annual cost-of-living adjustments to retirees. That’s a good thing, too, because COLAs are one of the best benefits provided to federal retirees and survivors. They help you to keep up with the pace of inflation.
After a two-year drought during which no COLAs were paid, COLAs in 2012 jumped to 2.6 percent for Civil Service Retirement System annuitants and to 2 percent for Federal Employees Retirement System annuitants. The Congressional Budget Office is predicting that the 2013 COLA will be 1.6 percent for both.
Here’s why CSRS and FERS retirees are treated differently: When the FERS law was passed, it provided that if the Consumer Price Index for Urban Wage Earners and Clerical Employees (CPI-W) increases by 3 percent or more in any year, FERS-covered retirees and survivors will receive one percentage point less. If the CPI-W increases by 2 percent to 3 percent, the adjustment will be 2 percent. If it increases by less than 2 percent, the adjustment will equal the CPI-W.
There is one more difference in the treatment of CSRS and FERS retirees. CSRS retirees receive COLAs regardless of their age. With a few exceptions, FERS retirees won’t receive their first COLAs until they reach age 62.
Here are some of the exceptions: Employees who retire under the special provisions for law enforcement officers, firefighters or air traffic controllers will begin receiving COLAs after they retire, regardless of their age, as will spouses, former spouses, and insurable interest and survivor annuitants. Also eligible for COLAs before age 62 are military reserve technicians whose separation from technician service resulted from a loss of military membership or rank because they became disabled after reaching age 50 and completing 25 years of service.
All COLAs are effective on Dec. 1 of the year in which you become eligible. The increases are reflected in payments in January following the effective date. That’s the key to when your COLA will be applied.
If you have been retired for less than one full year, the COLA will be prorated. The proration will be based on the number of months between your annuity start date and the effective date of the first COLA after that.
To avoid the proration of the 2013 COLA, you’d need to have retired no later than Dec. 31, 2011. That way, you would have been on the annuity rolls for a full 12 months. If you retired after that date, your COLA would be reduced by 1/12th for each month that you were still employed.
So, for example, if you are a CSRS employee who retires in June 2012, you would get 6/12ths of the 2013 COLA. If the CBO is right in its projection of a 1.6 percent COLA in 2013, you’d get half of that — 0.08 percent.