What's The Difference In The Annual COLA And Pay Raise? | FedSmith.com (2024)

Every year around this time, we receive comments and questions from our readers about the cost of living adjustment (COLA) and the pay raise. Each is determined around the same time of the year and both take effect in the following year, assuming that there is a COLA and/or pay raise.

It’s Confusing

The comments we see indicate that some federal employees and retirees do not understand the difference between the two. This is understandable; the federal pay and retirement systems are governed by a complex process with many different factors that can lead to endless variations depending on a person’s situation.

The purpose of this article is to explain the differences between the COLA and the annual pay raise in an effort to clear up any misconceptions or confusion.

The COLA

The2024 COLA was recently announced. This applies to federal retirees and Social Security recipients, butnot to current federal employees. The 2024 COLA is 3.2%, however, as you will see below, not all federal retirees will receive this amount.

The process for determining the COLA is automatic. It is not subject to politics or a result of the action of Congress or the president each year. You will either get one or not based solely on a formula that is put in place by law and determined based on the cost of living as measured by the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W).

How is the 2024 COLA Calculated?

This is a description from the Social Security Administration of how to compute the 2024 annual COLA:

The last year in which a COLA became effective was 2022. Therefore the law requires that we use the average CPI-W for the third quarter of 2022 as the base from which we measure the increase (if any) in the average CPI-W. The base average is 291.901, as shown in the table below.

Also shown in the table below, the average CPI-W for the third quarter of 2023 is 301.236. Because this average exceeds 291.901 by 3.2 percent, the COLA effective for December 2023 is 3.2 percent. The COLA calculation, with the result rounded to the nearest one-tenth of one percent, is:

(301.236 – 291.901) / 291.901 x 100 = 3.2 percent.

This is how the description above looks broken down in real numbers:

Which Federal Retirees Get the COLA?

In case the above description was not confusing enough for you, it gets even more complex: not all federal retirees receive the same COLA.

ForCivil Service Retirement System (CSRS) retirees, the COLA increase percentage is applied to their monthly benefit amount before any deductions and is rounded down to the next whole dollar.

UnderFERSor for FERS Special benefits, if the increase in the Consumer Price Index (CPI) is 2% or less, the COLA is equal to the CPI increase. If the CPI increase is more than 2% but no more than 3%, the Cost-of-Living Adjustment is 2%. If the CPI increase is more than 3%, the adjustment is 1% less than the CPI increase. The new amount is rounded down to the next whole dollar.

In order to get the full COLA, without regard to whether you are in FERS or the CSRS system,you must have been in receipt of annuity payments as a federal retiree for a full year, otherwise, the COLA will be prorated.

Furthermore,Federal Employees Retirement System (FERS) and FERS Special Cost-of-Living Adjustments are not provided until age 62, except for disability, survivor benefits, and other special provision retirements.

The Pay Raise

So what about the annual pay raise?

Unlike the COLA, this process IS subject to politics. Who is in office can very much impact whether or not a pay raise is awarded to the federal workforce.

The annual pay raise is also different from the COLA in that itonly applies to current federal employees. Federal retirees are not subject to the annual raise; the increase in their annuity payments is determined by the automatic COLA process as mentioned above.

What has happened most often in the last several years is that Congress remains silent on whether or not to give current federal employees a pay raise for the next year, and the president then sets the amount of the raise, usually in late August. President Biden did that this year when he sent a letter outlining an alternative pay plan for a 5.2% 2024 pay raise for current federal employees.

As of right now, it looks most likely that this will be the final amount of the 2024 federal pay raise, but it does not become official until the president issues an executive order finalizing it which usually occurs in mid to late December.

Who Comes Out Ahead?

So who gets more? Do federal retirees get a higher COLA or do federal employees get a higher raise?

Once again, the two are mutually exclusive because of how they are determined. Consequently, the answer to this question will vary from year to year. In some years, federal retirees fare better; in other years, current federal employees will get a higher pay raise. For 2024, it looks like federal employees will come out on top because of the pay raise proposed by President Biden.But again, the bottom line is one has nothing to do with the other.