COLA calculations

 

 

The Department of Defense applies the Social Security Administration’s calculation for COLAs to military pensions. Although the money comes from different agencies, the numbers are the same.

The COLA for the following year (applied in January) is calculated from the third quarter of the current year. The Bureau of Labor and Standards (BLS) supplies the official inflation data for the Consumer Price Index and it’s averaged to determine the year’s increase. It’s compared to the last year in which a COLA was applied (not just last year!) and then the difference is converted to an annual rate.

2008 was the last year in which a COLA was applied to military pensions. The 2009 CPI actually dropped compared to 2008, but luckily the military retirement system does not provide for a “negative COLA”. However, when 2010 CPI data was compared to the last year a COLA had been applied, the CPI had still not risen significantly over 2008. It actually started “in the hole” for 2009 and the CPI had to rise even further before exceeding 2008’s data.

The result was that there was no COLA for 2010 either. The 2011 CPI has started to rise above the 2008 data but July-August-September are the months that “count” toward a COLA to be applied in 2012.

Several veteran’s organizations maintain a “COLA watch” to track the CPI changes and predict the following year’s COLA.

It’s not exactly exciting drama, but retirees can forecast their COLA as soon as the September CPI data is added to the calculations. This is usually released by late October or early November.

Next post:  TIPS & I bonds.

 

Related articles:

Living with inflation

Effect of inflation on a dollar

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WHAT I DO: I help you reach financial independence. For free. I retired in 2002 after 20 years in the Navy's submarine force. I wrote "The Military Guide to Financial Independence and Retirement" to share the stories of over 50 other financially independent servicemembers, veterans, and families. All of my writing revenue is donated to military-friendly charities.

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