Cost-of-Living Adj.: How COLAs Work for CSRS and CSRS-Offset Annuitants

Understanding Cost-of-Living Adjustments (COLAs) – Part I – How COLAs Work for CSRS and CSRS-Offset

Federal employees are eligible to receive annual government-wide pay increases and locality pay adjustment increases each year. The government-wide pay increase each year is set by the President and if Congress takes no action, the pay increase will go into effect on the first day of the new leave year.

Federal annuitants and survivor annuitants receive cost-of-living adjustments (COLAs). COLAs are set by law. This is the first of two FEDZONE columns discussing the calculation of COLAs for federal annuitants and survivor annuitants. The COLA amount can differ depending on whether an annuitant is a CSRS or FERS annuitant or survivor annuitant. This column discusses CSRS COLAs.

Some Definitions with Respect TO COLAs

Before explaining the calculation of the CSRS COLA, a definition of terms is necessary and presented here:

• Base quarter. The 3^rd calendar quarter starting July 1 and ending September 30.
• Consumer Price Index for Urban Workers (CPI-U). The index published monthly by the Department of Labor that reflects changes in consumer prices for urban wage earners and clerical workers.
• Base quarter price index. The arithmetical mean of the CPI-U for the three months comprising a base quarter – July, August and September.
• Cost-of-living adjustment (COLA). An increase in an annuity based on the increase in the CPI -between two consecutive base quarters.
• Effective date. COLAs are effective on December 1 of the year in which an annuitant becomes eligible. Increases are first reflected in annuity checks payable in January following the effective date.
• Annuity commencing date. The date an annuity first begins to accrue.

CSRS COLA Rate

The amount of a CSRS COLA is determined by the prevent change in the base quarter index from the previous year to the year in which the COLA is to be put into effect, adjusted by the nearest 1/10 of 1 percent. The following example illustrates:

9.6/296.4 x 100 =3.24

CSRS COLA Rate = 3.2% (adjusted to the nearest 1/10 of 1 percent) effective December 1, 2023.

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CSRS COLA Increase

A CSRS or CSRS Offset annuitant’s new gross monthly annuity, reflecting the COLA increase, is calculated by multiplying the old gross monthly annuity by the COLA factor (1 plus the COLA rate):

New gross monthly CSRS annuity = Previous gross monthly CSRS annuity x (1+ COLA rate)

The following example illustrates:

Example 1. Frank is a CSRS annuitant. During 2023, Frank’s gross monthly annuity was $6,250. The 2024 CSRS COLA is 3.2 percent.

Effective January 1, 2024, Frank’s CSRS gross monthly annuity equals:

$6,250 x (1+.032) = $6,250 x 1.032 = $6,450.

Adjustments to the Monthly Annuity After the COLA Has Been Applied

The new gross monthly annuity is the annuity payable as a result of the COLA adjustment and after the following adjustments, when applicable, have been made:

• Reduction for survivor benefits
• Reduction for early retirement
• Reduction for unpaid redeposit for unpaid deposit service performed before Oct. 1, 1982, and
• Reduction for unpaid redeposit for service prior to March 1, 1991.

The following example illustrates:

Example 2. Same facts as in Example 1 except that Frank’s CSRS annuity is reduced for the cost of a spousal survivor annuity ($540 per month), an unpaid deposit service performance before October 1, 1982 ($100 per month) and a reduction of $250 per month because of a redeposit for service ending prior to March 1, 1991.

Frank’s 2024 CSRS monthly annuity, starting January 1,2024 is:

$6,450 less $540 less $100 less $250 = $5,560.

The following should be noted:

1. The gross monthly annuity is always rounded to the lower dollar. However, the gross monthly annuity after a COLA must reflect an increase of at least $1.00, and
2. The COLA is applied to the gross annuity before withholding for federal and state income taxes, health, dental and vision, life and long-term care insurance premiums.

Proration of the First CSRS COLA

The amount of a CSRS annuitant’s first COLA is prorated. The proration is based on the number of months from the annuity commencement date to the effective date of the first COLA after the commencement date.

In particular, retirees receive one-twelfth of the applicable COLA for each month (not to exceed 12 months) that they are in receipt of an annuity before December 1^st of the first year of retirement. In order to receive the full December 1^st increase, a retiree’s commencing date for retirement can be no later than December 31 of the previous year.

From the chart below, a first year CSRS or CSRS Offset annuitant will determine the number of months he or she is on the annuity rolls at the time of the COLA. The COLA rate is divided by 12 and multiplied by the number of months on the annuity roll. The result is rounded to the nearest 1/10 of one percent, equaling the prorated COLA.

The following example illustrates:

Example 3. Laura, a CSRS annuitant, retired from federal service on July 30, 2023. The 2024 COLA is 3.2 percent.

Laura’s CSRS annuity commencement date: August 1, 2023

Number of months during 2023 on annuity roll:  4

4/12 x 3.2% = 1.1%

Laura’s 2023 gross CSRS monthly annuity before 2024 COLA = $3,600

Gross monthly annuity after COLA (effective with the first annuity check in 2024 dated January 1, 2024):

$3,600 x (1 + .01) = $3,882

It is important to note that proration applies only to a CSRS or CSRS Offset annuitant’s first year COLA.

CSRS Survivor Annuities

A CSRS survivor annuity is payable to one individual – a spouse, a former spouse, or to an insurable interest. The CSRS survivor annuity commences on the day after the death of the CSRS annuitant.

The following are the rules for a CSRS survivor annuitant’s first year COLA:

1. If the deceased CSRS or CSRS Offset annuitant had received his or her first COLA, then the survivor annuity is not subject to proration.
2. If a CSRS or CSRS Offset annuitant had not received his or her COLA, then the survivor annuitant’s first COLA is prorated based on the commencing date of the annuitant’s annuity, and
3. The proration rules also apply to the first COLA paid to the survivor of a CSRS of CSRS Offset employee who died in service.

The following two examples illustrate the three rules listed above.

Miscellaneous Provisions

The following two miscellaneous provisions with regard to CSRS COLAs:

1. The law does not provide for a CSRS COLA to be applied to a Voluntary Contribution Program (VCP) annuity that is purchased by some CSRS and CSRS Offset employees when they retire; and
2. A reemployed annuitant’s salary is offset by the amount of their CSRS annuity. When a CSRS COLA is applied to the annuity, the reemployed annuitant’s payroll office must make an additional salary offset. The payroll office determines the new monthly CSRS annuity rate to be used for reducing the salary by adding the COLA (full or prorated, as appropriate) to the previous rate. The additional offset in salary is effective from December 1 of such year.

Edward A. Zurndorfer is a CERTIFIED FINANCIAL PLANNER™ professional, Chartered Life Underwriter, Chartered Financial Consultant, Chartered Federal Employee Benefits Consultant, Certified Employees Benefits Specialist and IRS Enrolled Agent in Silver Spring, MD. Tax planning, Federal employee benefits, retirement and insurance consulting services offered through EZ Accounting and Financial Services, and EZ Federal Benefits Seminars, located at 833 Bromley Street – Suite A, Silver Spring, MD 20902-3019 and telephone number 301-681-1652. Raymond James is not affiliated with and does not endorse the opinions or services of Edward A. Zurndorfer or EZ Accounting and Financial Services. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS, we are not qualified to render advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional.

How COLAs Work for CSRS and CSRS-offset