Diet COLA on the Horizon

Federal retirees again are on track to receive a small annual cost-of-living adjustment boost in 2013, but it will probably be a lot smaller than this year’s increase.

The COLA figure for next year isn’t out yet, but it’s likely to be somewhere around 1.4 percent, based on the latest numbers. The government publishes the annual cost-of-living adjustments typically in late October, based on the percentage increase (if any) in the average Consumer Price Index for Urban Wage Earners and Clerical Workers (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 cost-of-living adjustment for 2012 was 3.6 percent -- the first increase since 2008.

The CPI-W rose 1.7 percent between August 2011 and August 2012, largely due to an increase in gasoline prices. The average of the July, August and September numbers along with the average figure from the third quarter of 2011 will be used to calculate the 2013 COLA, which is estimated to be about 1.38 percent. In May, the Congressional Budget Office predicted a COLA boost of 1.3 percent in 2013.

Does your head hurt yet? For more math fun, check out this explanation from the Social Security Administration on how COLAs are calculated.

The bottom line? While retirees probably will get an increase, it won’t be as large as the 2012 COLA. If, for the sake of argument, the 2013 COLA turns out to be 1.4 percent, that means federal retirees -- whether they are covered by the Civil Service Retirement System or the Federal Employees Retirement System -- will receive the full 1.4 percent. According to the formula, if the full COLA increase is 3 percent or higher, as it was for 2012, FERS retirees receive 1 percent less than the full increase. So FERS retirees received a 2.6 percent 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 likely will be in 2013, FERS retirees receive the same as CSRS retirees. In other words, 1.4 percent-ish all-around.

This year's increase takes effect on Dec. 1 and will be reflected in retirees’ first annuity payments in January 2013. The salaries of federal employees are not affected by the COLA announcement. For a history of COLAs and federal employee pay raises going back to 1970, check out this recent Retirement Planning column from Tammy Flanagan, the senior benefits director for the National Institute of Transition Planning Inc.

Speaking of the pay freeze, it’s important to remember that while an across-the-board freeze remains in effect until at least March 27, 2013, (that’s when the temporary spending measure funding the government expires), individual employees remain eligible for raises through promotions, step increases and performance awards. And there’s always the chance that Congress will approve a budget in 2013 and support President Obama’s recommended 0.5 percent pay increase. Based on comments from several readers since the announcement of the extended pay freeze, however, many employees are simply indifferent at this point, given the pocket change that a 0.5 percent increase yields for the majority of them. Still, something is better than nothing, as the saying goes.