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Retiree COLAs: Tracking Inflation

Sep. 18, 2014 - 03:45AM   |  
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Military retired pay rises each year to ensure that inflation does not erode the purchasing power of retirees. These cost-of-living adjustments, known as COLAs, match the annual increase in Social Security benefits. They become effective each Dec. 1 and first show up in January paychecks.

The foundation for the COLA adjustment is the Labor Departmentís Consumer Price Index, a measure of the cost of certain categories of goods and services that is updated monthly. There is one overall CPI, as well as a variety of more specific indexes. The index upon which the retired pay COLA is based is called the CPI for Urban Wage Earners and Clerical Workers, or CPI-W.

The rate of inflation may rise and fall throughout the year, but the exact increase in retired pay is based only on the average inflation rate over the last quarter of the fiscal year that runs from Oct. 1 to Sept. 30. The size of the increase is equal to the difference between the average inflation rate in that quarter and the average inflation rate in the same quarter of the previous fiscal year. For the purposes of military retired pay, this means the only months in which inflation matters are July, August and September.

Service members who retire in a given fiscal year receive a partial COLA for that year only, based on the date of their retirement. They receive the full COLA in subsequent years.

The retired pay COLA technically is not automatic; Congress must formally approve it each year.

Please note that since retireesí COLA is calculated based on the CPI for Urban Wage Earners and Clerical Workers, not the overall CPI, monthly changes in the index may differ from national figures reported elsewhere.

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