The COLA Factor

Every year, about 4 million federal civilian and military retirees and 50 million Social Security beneficiaries are granted a cost-of-living adjustment to their benefits. Lately, I've received quite a few e-mails about COLAs from employees who are planning to retire within the next few months. They're wondering how the 2009 COLA -- which could be one of the biggest in years -- could affect the date they plan to retire.

The COLA, which will be unveiled in mid-October, is derived by computing the percentage increase in the Consumer Price Index for urban wage earners and clerical workers from the third quarter average of 2007 to the third quarter average of 2008. The July 2008 level was 6.2 percent higher than July 2007 -- the highest average increase since 1991.

The CPI is a measure of the average change over time in the prices paid by urban consumers for various goods and services. It is developed from detailed spending information provided by families and individuals. More information is available on the Bureau of Labor Statistics Web site.

Now for the bad news: Most federal employees who retire in the next several months will not be affected much, if at all, by the CPI increase for 2008. This is because the first COLA they will receive on their federal retirement benefits under either the Civil Service Retirement System or the Federal Employees Retirement System will be prorated based on how long they've been retired. And FERS employees who are under 62 won't be entitled to a COLA, in most cases.

On the other hand, the first COLA on Social Security benefits is not prorated. If you begin receiving Social Security benefits in 2008, you will be entitled to the full adjustment on Jan. 1, 2009.

There also are COLA considerations related to Thrift Savings Plan annuities. If you have purchased a TSP annuity with increasing payments, the amount of the monthly payment changes each year on the anniversary date of the first payment, based on the change in the CPI. But increases are capped at 3 percent. If you choose to receive monthly payments directly from your TSP account, these payments will not receive cost-of-living adjustments. Rather, the amount and duration of these payments will be affected by changes in the returns of your investment.

Let's look a little more closely at how COLA considerations differ in CSRS and FERS.

CSRS

Under CSRS, a retiree's first COLA is prorated. CSRS retirees will get one-twelfth of the applicable cost-of-living increase for each month they were on the annuity rolls before Dec. 1, 2008, not to exceed 12 months. To get the full Dec. 1, 2008, increase, a retiree's annuity must have started no later than Dec. 31, 2007.

Those who retired on Dec. 31, 2007, or Jan. 3, 2008, will be entitled to eleven-twelfths of the 2008 COLA this year, since their annuities commenced in January 2008, not December 2007. To get one-twelfth of the Dec. 1, 2008, increase, the annuity must have commenced no later than Nov. 30, 2008.

For example, if Paul retires on Aug. 31, 2008, his first COLA will be due on Dec. 1 (payable in his Jan. 1, 2009, check). He would be entitled to one-fourth of the 2008 COLA. If the COLA adjustment is 6 percent and his monthly retirement is $4,000, his retirement would be increased by 0.25 x 6 percent x $4,000, or $60 per month.

FERS

FERS retirees also get a CPI-based COLA adjustment, but how it's determined is a little more complicated. Under FERS, when the CPI increase is 3 percent or greater, the COLA is 1 percent less than the CPI increase. When the CPI rise is less than 3 percent, the COLA is the CPI increase or 2 percent -- whichever is lower. For retirees who have not been on the annuity rolls for a full year, the "diet" COLA granted under FERS is prorated in the same manner as it is for CSRS retirees.

Only those FERS retirees who were 62 as of Dec. 1, 2008, will be entitled to a COLA for this year. There are exceptions that allow some retirees to receive a COLA even if they retire before turning 62, such as:

• In general, disability annuitants can get COLAs without regard to their age. COLAs are not payable on FERS disability annuities during the annuitant's first year on the rolls, however, if the annuity rate is based on 60 percent of average salary. But COLAs are payable during the first year if the annuitant's rate is based on an earned benefit or the annuity is recalculated because the annuitant has reached 62.
• Military reserve technicians can get COLAs as long as their separation from service results from a loss of military membership on account of disability after turning 50 and completing 25 years of service.
• Employees who retired under special provisions for law enforcement officers, firefighters, or air traffic controllers also can get earlier COLAs.

What to Watch For

If you're anticipating a cost-of-living adjustment higher than any since 1991, then you should be watching the price of gasoline and groceries between now and the end of September. Among the categories of items included in the CPI, food and fuel have seemed to have the biggest increases in prices.

If the COLA were granted based on the inflation rates as of July 14, the adjustment would be 6.2 percent. But the recent drop in the price of gas might affect the final adjustment. A drop in crude oil prices has pulled down retail prices for both gas and diesel fuel. The weekly price of regular grade gas, which peaked at $4.11 per gallon on July 14, averaged $3.81 per gallon on Aug. 11. CPI data for August are scheduled for release on Sept. 16. Next year's COLA will be announced on Oct. 16. Tammy Flanagan is the senior benefits director for the National Institute of Transition Planning Inc., which conducts federal retirement planning workshops and seminars. She has spent 25 years helping federal employees take charge of their retirement by understanding their benefits.