Outlook Is Decent For a 2017 COLA

There is still a decent chance federal retirees will see a 2017 cost-of-living adjustment, based on the latest data released on Friday.

The Bureau of Labor Statistics announced the Consumer Price Index for August on Sept. 16, which includes data critical to the COLA calculation. The annual COLA for all retirees is based on the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W), which measures price changes in food, housing, gas and other goods and services. The CPI-W rose 0.1 percent in August, and the index has increased 0.7 percent over the last 12 months to an index level of 234.909.

Why does that matter? Because it’s slightly more than the average for the third quarter of 2014 (234.242), which is an important component in the COLA equation. The July, August and September 2016 CPI-W numbers could bring up that current 234.909 average more, but it’s too soon to tell. In July, the index level for the last 12 months was at 234.789, so there was a tiny increase over the last two months.

The exact cost-of-living adjustment for next year won’t be known until October 18 when BLS releases the September CPI-W number, the final data point in the equation.

Still it’s not clear yet if retirees will receive a modest boost, or nothing, as was the case for 2016. But things look better now than they did at the same time last year.

The average of the July, August and September 2016 consumer price numbers, along with the average figure from the third quarter of 2014, will be used to calculate the 2017 COLA. The annual COLAs are based on the percentage increase (if any) in the average CPI-W for the third quarter of the current year over the average for the third quarter of the last year in which a COLA became effective. The last time a COLA became effective was in October 2014. If there’s no percentage increase, there’s no COLA, which was what happened in late 2015, affecting 2016.

Retirees received a 1.7 percent COLA increase for 2015, a 1.5 percent boost for 2014, a 1.7 percent increase for 2013 and a 3.6 percent bump for 2012. The 2012 COLA increase was the first since October 2008 (which took effect in 2009).

According to the formula, if there is an increase, here’s how it plays out: If the full COLA increase is 3 percent or higher, as it was for 2012, then retirees under the Federal Employees Retirement System receive 1 percentage point less than the full increase. So FERS retirees received a 2.6 percent bump for 2012. If the COLA falls between 2 percent and 3 percent, then FERS retirees would receive 2 percent. If the increase is less than 2 percent, as it was for 2015, FERS retirees receive the same as retirees under the Civil Service Retirement System.

Employees still working for the federal government do not receive a COLA, but they may end up doing better than retirees. Federal workers at the moment are on track to receive a 1.6 percent pay raise in 2017. 

For a history of COLAs and federal employee pay raises going back to 1970, review this Retirement Planning column from Tammy Flanagan.