Coke and Pepsi Have Nothing On These COLAs

Federal retirees, from both Civil Service and the Military are entitled to COLA’s — Cost Of Living Adjustments — in their pensions and annuities.  Hmmm, reminds me, I had better do a post soon on the difference between retirement pay and annuities.  These retirements are special in comparison to many in the run-of-the mill commercial world retirement systems and it makes a big difference in retirement planning and divorce division of present and future assets.  Here’s a run down.

The U.S. Department of Labor calculates the change in the Consumer Price Index (CPI) for urban wage earners and clerical workers from the third quarter average of the previous year to the third quarter average for the current year.  This percentage increase then affects different categories of retirees in different ways.  Here’s the latest figures in 2006:

For Civil Service Retirement System (CSRS) or Organization and Disability Retirement System (ORDS) benefits, the increase percentage is applied to your monthly benefit amount before any deductions, and is rounded down to the next whole dollar.  So a regular CSRS retiree will get the full increase in his or her check starting 1 February. (the payment due for January 1 to January 31st …you knew the government always paid in arrears, didn’t you?)

Military retirees under the Final Pay retirement system … the “old” system available to all retirees who entered the service prior to September 1980 … will get a like amount added to the retirement.

For Federal Employees Retirement System (FERS) or FERS Special benefits, the rules are very different.  First of all, FERS retirees don’t get COLAs until they are 62.  If the increase in the CPI is 2 percent or less, the Cost-of-Living Adjustment (COLA) is equal to the CPI increase. If the CPI increase is more than 2 percent but no more than 3 percent, the Cost-of-Living Adjustment is 2 percent. If the CPI increase is more than 3 percent, the adjustment is 1 percent less than the CPI increase. The new amount is also rounded down to the next whole dollar.  Some folks have taken to calling this a “diet COLA”, perhaps for good reason.

There are also thousands of Federal Employees, some retired and some still working who are under the CSRS Offset system.  People retired under CSRS or CSRS Offset get a full COLA each January. Period. And that COLA goes to anyone, regardless of age or length of service, provided they take or took immediate retirement. So if the January COLA turns out to be 3.4 percent those retirees will get 3.4 percent.

But the rules are different for FERS retirees. They get so-called diet COLAs, and they don’t even get that until they are age 62. So what happens to people with both CSRS and FERS service. An individual retired under CSRS will get the full COLA (let’s assume it remains at 3.4 percent) in January. Period. He or she can be any age provided they’ve been on the retirement rolls long enough to qualify for the 2007 adjustment. The 3.4 percent will be applied to all their time under CSRS or CSRS Offset.  If you have time under the FERS system, you will have to be age 62 to qualify for a COLA and then you would get a 2.4 percent raise for that portion of time under FERS, and the full COLA for the time under CSRS.

There are some people who get Social Security, regular military retired pay and a CSRS or FERS, or both, benefit. The full COLA applies to all of them, except for that portion under FERS.

To add just a little complication, remember there are three different military retirement systems that your client may fall under.  They differ both in determining the initial retirement pay and very importantly how COLA’s are applied.  If your work or your advice revolves around Future and present (net Present Value — NPV) or people’s income this is important stuff.  A military retiree at, say, age 40 who lives to 85 or 90 will have a huge difference in the money he or she collects based on how COLA’s are factored in.  All three retirement systems have an annual cost of living adjustment. This is a subtle, yet very important detail. Over the lifetime of your retirement the cost of living adjustment could more than double your retirement check.

The COLA for the final pay and high 36 systems is determined each year by the national Consumer Price Index. But the COLA for the CSB/REDUX retirement system is the Consumer Price Index minus 1%.

For Example: A retiree under the High 36 may see a COLA increase in their retirement check of 3.5% in 2007, while a retiree under the CSB/REDUX plan would get a COLA increase of only 2.5%.

Note: There is one more twist to the COLA for the CSB/REDUX retiree. At age 62 the COLAs and multiplier are readjusted so that the High 36 and CSB retirees get the same monthly pay.

I’ll let you go get a COLA now, all this typing has made me thirsty ;-)

Disclaimer

As always remember that this site, although written by a retiree with substantial experience in the school of hard knocks, it is for personal, lay opinions and informational purposes only. If you have a legal question you should seek help from a legal professional. If you have questions involving current or future values of pensions you need an actuary or competent pension valuation expert. If your questions are tax-related, seek a competent tax advisor. In other cases, I recommend the base chaplain.

If you really need an accurate reading on a case involving these issues, I’d suggest you call Bill — 719-475-7529