Counting COLAs

This week brought an annual event that's always highly anticipated: the announcement of cost-of-living increases for federal retirees, including those in both the Civil Service Retirement System and the newer Federal Employees Retirement System.

Here's how the COLAs will play out next year:

Remember that COLAs under FERS do not apply to retirees who are under age 62 as of Dec. 1, except:

• Disability retirees, including military reserve technicians who are medically disqualified for military service or the rank required to hold their positions. These annuitants receive immediate COLAs, regardless of their age. However, disability retirees who are receiving 60 percent of their average salary do not receive COLAs.
• Military reserve technicians whose separation from service resulted from loss of military membership or rank on account of disability after attaining age 50 and completing 25 years of service.
• Employees who retired under special provisions for law enforcement officers, firefighters or air traffic controllers.

Recent Retirees

Cost-of-living adjustments for CSRS and FERS are effective on Dec. 1 each year. If you retired under CSRS after Dec. 3, 2005, or if you retired under FERS after Nov. 30, 2005 (and are eligible for an immediate COLA), your first COLA will be pro-rated. The pro-rating formula is based on the number of months you were entitled to an annuity during 2006.

For example, if you retired under CSRS on Jan. 3, 2006, you were entitled to an annuity from January to November 2006 -- 11 months. So you will receive 11/12 of the 2006 COLA. Here's a chart showing how the pro-rating works out:

Let's look at an example. Suppose Maria's husband died on March 15, 2006. Her survivor annuity began March 16. She will receive 9/12 of the COLA on Dec. 1. On the other hand, suppose John retired under CSRS on March 15. His retirement began on April 1. He will receive 8/12 of the COLA on Dec. 1.

For FERS annuitants who are not eligible to receive a COLA during their first year (or more) on the annuity roll, the initial COLA they receive after becoming eligible is the full COLA without pro-rating. This category includes:

• Annuitants under age 62 whose annuity commences at least one year prior to turning 62.
• Disability annuitants whose annuity benefits are based on 60 percent of average pay.

Annuity Impact

How does the COLA increase translate into real-world dollars? The chart below provides a guide.

Social Security Calculations

In general, the annual increase in benefits for Social Security recipients can be determined by multiplying the COLA amount by the benefit amount. But the exact computation is more complex.

Each Social Security benefit is based on a "primary insurance amount." The PIA in turn is directly related to the primary beneficiary's earnings via a benefit formula. It is the PIA that is increased by the COLA, with the result truncated to the next lower dime. So if the initial PIA is $1,011.00 and it is increased by a 3.3 percent COLA, the new PIA would be $1,044.30 after truncation to the next lower dime.

When a COLA kicks in, the PIA is increased as described above, and the steps required to calculate the new benefit amount are repeated with the new, higher PIA. Due to the rounding, possible offsets and final truncation in these steps, the increase in the new monthly benefit amount over the previous amount may differ somewhat from the COLA.

TSP Annuities

Once you have chosen either a single life or a joint life annuity, you must decide whether you want to receive level or increasing payments. The amount of the monthly payment can change each year on the anniversary date of the first annuity payment. The amount of the change is based on the change in the Consumer Price Index. When annuity payments start, they are smaller than they would be if you had selected level payments, but usually there is an annual increase in monthly payments. Increases cannot exceed 3 percent per year, but monthly payments cannot decrease, even if the CPI decreases.

Increasing payments can be combined with either the single life or the joint life annuity with your spouse. With a joint life annuity, the annual increase applies whether you or your spouse is the survivor. Increasing payments cannot be combined with a joint life annuity when the joint annuitant is someone other than your spouse.