OPM has announced 8.7% COLA for CSRS, meaning 7.7% COLA for FERS annuitants.
Edward A. Zurndorfer
The Office of Personnel Management (OPM) recently announced the 2023 cost-of-living adjustment (COLA) for CSRS and FERS annuitants. The COLA will be effective December 1,2022 and payable in the January 2023 annuity checks.
2023 CSRS COLA
The CSRS COLA is the same that Social Security beneficiaries (both retirement and disability beneficiaries) receive. The COLA is based on the change in the consumer price index for urban wage earners and clerical workers (CPI-W). The Department of Labor’s Bureau of Labor Statistics (BLS) calculates the change in the CPI-W. The amount of a COLA is determined by the percent change in the third quarter (July, August, September) CPI-W from the previous year to the year in the which the COLA is to become effective. For 2023, the percent change in the CPI-W is 8.7 percent. Therefore, the 2023 COLA for Social Security retirement and disability beneficiaries and CSRS annuitants is 8.7 percent.
All CSRS and CSRS Offset annuitants who have been retired from federal service for at least one year as of December 1,2022 will be eligible for the full 8.7 percent COLA. CSRS annuitants who retired between December 4,2021 and November 3,2022 will receive 1/12 of the 8.7 percent COLA for each month they received a CSRS annuity check during 2022. The following table shows the prorated COLA according to the month the CSRS annuity began:
Prorated CSRS COLAs Effective 12/1/2022
|Monthly Annuity Began||Percentage of COLA||COLA Effective 1/1/2023|
|December 2021 or Earlier||100%||100% of 8.7% = 8.7%|
|January 2022||11/12 of 100% = 91.6%||91.6% of 8.7% = 8.0%|
|February 2022||10/12 of 100% = 83.3%||83.3% of 8.7% = 7.2%|
|March 2022||9/12 of 100% = 75.0%||75.0% of 8.7% = 6.5%|
|April 2022||8/12 of 100% = 66.7%||66.7% of 8.7% = 5.8%|
|May 2022||7/12/of 100% = 58.3%||58.3% of 8.7% = 5.1%|
|June 2022||6/12 of 100% = 50.0%||50.0% of 8.7% = 4.4%|
|July 2022||5/12 of 100% = 41.7%||41.7% of 8.7% = 3.6%|
|August 2022||4/12 of 100% = 33.3%||33.3% of 8.7% = 2.9%|
|September 2022||3/12 of 100% = 25.0%||25.0% of 8.7% = 2.2%|
|October 2022||2/12 of 100% = 16.7%||16.7% of8.7% = 1.5%|
|November 2022||1/12 of 100% = 8.3%||8.3% of 8.7% = 0.7%|
The COLA is applied towards the gross annuity before any reduction to the gross annuity, including the cost to give a survivor annuity. The following two examples illustrate:
Example 1. Jason retired from federal service on January 3,2017 as a CSRS-covered employee. His starting CSRS gross annuity on February 1,2017 was $85,000. He elected to give the maximum CSRS survivor annuity benefit (55 percent) to his wife Alice. The cost to Jason to give a full spousal CSRS survivor annuity benefit was 10 percent of his starting gross annuity of $85,000, or $8,500. Jason’s net annuity during 2017 was therefore: $85,000 less $8,500, or $76,500.
Note that for the year 2017, the $76,500 net annuity must be reported by Jason as taxable income.
Nearly five years later, the original $85,000 CSRS gross annuity has increased through annual COLAs to $89,500 as of January 1, 2022. With the 8.7 percent CSRS COLA effective January 1, 2023, Jason’s gross CSRS annuity will increase by 8.7% of $89,500, or $7,786. As of January 1, 2023, his CSRS gross annuity increases to $89,500 plus $7,786 to $97,286. His net annuity after subtracting the cost of giving a full spousal CSRS survivor benefit of $8,500 will be: $97,286 less $8,500, or $88,786.
Note that for the year 2023, the $88,786 net annuity must be reported by Jason as taxable income.
Example 2. Geraldine retired from federal service on February 26,2022 as a CSRS-covered employee. Her starting CSRS annuity effective March 1,2022 was $125,000, or $10,417 per month. Geraldine is giving a full CSRS survivor annuity to her husband Frank. The annual cost to give a full CSRS survivor annuity was a 10 percent reduction of Geraldine’s starting CSRS gross annuity, or 10% of $125,000 equals $12,500 (1,042 per month) to Geraldine’s CSRS gross annuity. Geraldine’s net annuity during 2022 (10 months between March 1,2022 and December 31, 2022) is: $104,167 less $10,417, or $93,750.
Note that for the year 2022, the $112,500 net annuity must be reported by Geraldine as taxable income.
Since Geraldine retired in early 2022, she is not eligible for the full 8.7 percent CSRS COLA, effective January 1, 2023. In particular, since Geraldine retired on February 26,2022, her first year COLA will be prorated. In fact, because Geraldine’s monthly annuity began March 2022, from the table above Geraldine is entitled to 75.0 percent of the first year (2023) COLA, equal to 75 percent of 8.7 percent, or 6.5 percent. Therefore, effective January 1,2023 Geraldine’s CSRS gross annuity of $125,000 will increase by 6.5 percent to $133,156. Geraldine’s net annuity during 2023 will be: $133,156 less $12,500, or $120,656.
Note that for the year 2023, the $120.625 net annuity must be reported by Geraldine as taxable income.
2023 FERS COLA
The amount of the 2023 FERS COLA is 7.7 percent. With respect to determining each year’s FERS COLA, the rule is that if the percentage increase in the CPI-W is over 3.0 percent, then the FERS COLA is adjusted by the CPI-W less 1.0 percent. Since the percentage increase in the CPI-W for 2023 is 8.7 percent, the FERS COLA for 2023 is 8.7 percent less 1.0 percent, or 7.7 percent.
FERS COLAs generally do not apply to FERS annuitants who are under age 62 as of December 1, 2022. This is because if a FERS employee retires before age 62, there is no COLA until the FERS annuitant becomes age 62. The first FERS COLA will be applied to the annuitant’s FERS annuity on January first following the year in which the FERS annuitant becomes age 62. No matter which month during the year the annuitant becomes age 62, the FERS annuitant is eligible for the full COLA, with no proration of the first year COLA. The FERS retirement annuity supplement does not receive any COLAs. The following examples illustrate:
Example 3. Sherry’s retired from federal service in 2021 as a FERS employee with 30 years of federal service. She retired at age 57, which is a year after her minimum retirement age of 56 years and two months. Sherry is not giving a survivor annuity. Sherry’s starting FERS annuity was $38.500 in 2021 and she received a FERS annuity supplement of $13,000. The $38,500 FERS annuity will not be eligible for a FERS COLA until the year after the year Sherry becomes age 62, which will be during 2027. Her $13,000 FERS annuity supplement will continue with no COLA until the month and year that Sherry becomes age 62.
Note that for the years 2022 through 2026, the $38,500 FERS annuity and the $13,000 FERS annuity supplement must be reported by Sherry as taxable income.
Example 4. Ivan retired from federal service in September 2020 at age 60 with 20 years of federal service. He became age 60 on August 27, 2020. Ivan is not giving a survivor annuity. When he retired, Ivan’s starting FERS annuity was $23,000 and his FERS retirement annuity supplement was $12,000 per year. The $23,000 FERS annuity and the $12,000 FERS annuity supplement continued through 2021 and part of 2022 until August 2022 at which time the FERS annuity supplement stopped. Since Ivan became age 62 on August 27, 2022, his FERS annuity of $23,000 will be eligible for its first COLA on January 1, 2023. Ivan’s FERS annuity is eligible for the full 7.7 percent FERS COLA effective January 1,2023 even though Ivan became 62 in August 2022. There is no proration of the full FERS COLA during the first year a FERS annuitant (who retired before age 62) is eligible for a COLA to the FERS annuity. Therefore, Ivan’s gross annuity of $23,000 will increase effective January 1, 2023 by 7.7 percent.
$23,000 times 1.077, or $24,771.
Note that for the years 2020, 2021 and 2022, the $23,000 FERS annuity and the $12,000 FERS annuity supplement must be reported as taxable income by Ivan.
Note that for the year 2023, the $24,771 FERS annuity must be reported as taxable income by Ivan. Note also that Ivan’s $12,000 FERS annuity supplement ceased as of August 31,2022 because Ivan became age 62 on August 27, 2022.
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Other items to be noted with respect to the FERS COLA:
- For those FERS employees who retire after age 62, the first year COLA is prorated based on the number of months a FERS employee was retired prior to the date of the COLA (similar to what is done for CSRS and CSRS Offset employees no matter at which age they retire).
- For FERS annuitants who are giving a FERS survivor annuity, the FERS COLA is applied each year to the FERS gross annuity (and not to the FERS net annuity after subtracting the cost of the FERS survivor annuity benefit), similar to the application of the CSRS COLA to CSRS gross annuities when a CSRS survivor annuity benefit is given. The FERS COLA is not applied to the cost of giving a FERS survivor annuity benefit.
- FERS annuitants who are retired under a FERS disability retirement are eligible for the FERS COLA at any age.
- FERS annuitants who retired as a Special Provision Employee (Law Enforcement Officer, Firefighter or an Air Traffic Controller) are eligible for the FERS COLA no matter what age they retire.
Edward A. Zurndorfer is a Certified Financial Planner, 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 the employees of Serving Those Who Serve 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.