Understanding the Differences Between a Pay Raise and a COLA

There are a lot of myths surrounding the timing of retirement, especially in terms of maximizing annual federal employee pay increases, retirement benefits, and more. While there may not be a one-size-fits-all answer, there are ways to begin making the decision best suited to your lifestyle and goals. Unfortunately, if you plan to retire on December 31st of this year, you won’t get the full benefit of a COLA (cost-of-living adjustment) or pay raise.

When it comes time to consider the timing of your retirement, it’s crucial to avoid hinging the date off of pay adjustments entirely. By doing so, you may find yourself putting off retirement time and time again. For federal employees, the yearly pay increase factors into a high-three average salary as one of the main factors of retirement benefit calculations. Essentially, for each day you work and remain on payroll, your high-three will continue to increase.

Changes in pay can be done incrementally, through the January pay adjustment, or be comprised of other promotions. If you retired at the end of June, for example, the pay adjustment effective for most federal employees as of January 2nd would’ve been put into place for 5 ½ months over the past three years. Your high-three would have been higher, in this case, if you had retired at the end of December for 2021.

The rate of pay adjustments continues to be ever-changing, and our current financial uncertainty is no exception. For example, compared to last year, with a January pay adjustment of a 2.2% basic pay increase (and a 0.5% locality pay boost). This starkly contrasts President Biden’s proposal of a 4.6% increase – the highest federal pay increase in 20 years. Chances are, we won’t receive a confirmation from Congress one way or another until later on this year.

A cost-of-living adjustment, also referred to as a COLA, is granted to federal retirees, military retirees, and Social Security recipients. This adjustment is provided over the life of your retirement to ensure groceries, gasoline, utilities, and other costs of living are easily affordable on a set income. When it comes to older retirees, though, many argue that the utilized COLA formula unrealistically reflects the impact of inflation. Not all retirees, however, qualify to receive a COLA at any age, with restrictions on the Federal Employees Retirement System restricting retirees from receiving COLA until the age of 62 and beyond.

When it comes to receiving your initial COLA, you may experience proration depending on the number of months spent on annuity rolls before receiving COLA. In terms of FERS retirees, though, who are ineligible to receive COLAs throughout their first year, their initial COLA will be received sans proration. If you are choosing to retire at the end of this year, and are eligible for COLAs, your first COLA will be received in a January 2024 annuity payment after a December 1st, 2023 grant date.

A CPI-W is used to calculate the retirement COLA alongside a specialized index capable of tracking retail prices and how they affect clerical workers and hourly wage earners. Food, transportation, and apparel, among others, are granted a slightly higher weight from the CPI-W. Whenever there is an increase of 0.1% or more within the CPI-W, a COLA will be put into place. FERS COLAs, though, are typically 1% less than the CPI-W increase.