With the most significant FERS cost of living adjustment (COLA) in over a decade (4.9%) for FERS retirees and only a 2.7% pay raise for active federal employees set for January 2022, many feds are wondering why the large difference? This is a legitimate question, especially considering the recent jump in inflation. And the reason lies in the fact that both the pay raises for active federal employees, and the COLAs for federal retirees are based on changes in different variables. So, understanding how both are computed will give you better insight into the reason for the disconnect.
How Are COLAs Calculated?
So, how are FERS COLAs determined? Each year’s COLA is determined by the change in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W), which the U.S. Department of Labor calculates.
This means that if the CPI-W shows that prices have increased, then FERS pensions will receive a COLA. Hence, COLAs are linked directly to inflation as measured by the CPI-W.
It’s also important to note that regular FERS retirees will not receive any COLAs until age 62. To learn more about COLAs, read this article.
How Are Federal Pay Raises Calculated?
Unlike COLAs, pay raises are not directly linked to inflation but instead are passed by Congress and have the objective of keeping federal government positions competitive with their private counterparts.
Each year, the President may recommend an annual pay raise to Congress, and they may accept it or make their own proposal. Once Congress approves the raise, the President must then sign it into law.
Annual pay raises usually take effect in January of each year. Still, there have been years when no pay raises were passed, which can be detrimental to federal employees during extended periods of high inflation.
While as a FERS retiree, you can count on receiving COLAs, you have no such guarantees when it comes to your pay raises as an active employee. Because the driving force behind pay raises is a political one, they may not correlate with economic factors. Thus, federal pay raises might not keep up with inflation as much as the FERS pension. Now that you have a better understanding of the different variables that will increase your pay and pension, you are better equipped to create a successful financial plan. As always, if you don’t feel confident in creating your financial plan, consult with a qualified financial planner.
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2023 Legislative Change Notice
The SECURE ACT 2.0 passed and impacted many of the articles on this website. While the articles were correct when written, it’s impossible to re-write every article. Please consult a qualified professional (i.e., CFP®, CPA, or attorney) before implementing any strategy.