Update: Congress has repealed the Cost-of-living adjustments (COLA caps) for military retirees younger than age 62. New military entrants, after Jan. 1, 2014, who may ultimately qualify will still be impacted.
The Bipartisan Budget Act of 2013 (BBA) includes a provision that reduces working age military retirees’ annual cost-of-living adjustment (COLA) at one percentage point below annual inflation until they reach the age of 62. Full COLAs would be restored at age 62 however impacted retirees will never get back the money lost before the age of 62 under the new rules. Individual impact will vary based on the rate of inflation.
The military retiree COLA cap will be effective Dec. 15th, 2015. Estimated savings to the Department of Defense is approximately $6.3 billion over the first decade the COLA cap is in effect.
The bill does include a COLA “catch-up” phase where at age 62 there is a one-time adjustment to the retiree’s annual pay base. This will reset the COLA compensation to what it should have been at age 62 without the COLA caps in place Unfortunately the lost pay prior to age 62 will not be recouped.
There are currently no exemptions for this provision. This includes and is not limited to all of the following groups:
- Existing retirees who will not be age 62 by Dec. 15th, 2015
- Currently serving members who plan to serve 20 plus years
- Approximately 100,000 disabled military retirees
- Chapter 61 retired pay or for certain survivors’ benefits
- Survivors of retirees under age 62 (reduced annuity until the retiree would have reached age 62, full annual COLA is restored at that point)
If the COLA cap for military retirees was in effect now, retirees under the age of 62 would have received a COLA increase of .05% instead of the 1.5% increase that took effect for 2014.
Future Changes to Cola Caps
The COLA caps to military retirees came up quickly during budget negotiations and there was little time for congressional education on the impact or for military associations to form opposition against these cuts. These conversations are happening now and with the implementation date in 2015 there is time to amend the act prior to implementation. A positive sign is that both Defense Secretary Chuck Hagel and Rep. Paul Ryan (R-Wis.), chairman of the House Budget Committee, have acknowledged service members retired on medical disability should have been exempt.
Military Officers Association of America (MOAA) Assessment:
- Servicemembers who retire at the 20 year point will feel the full negative financial impact of the provision by experiencing a near 20 percent reduction in their retired pay by the time they reach age 62.
- An E-7 retiring this year with 20 years of service would see an average loss of over $3,700 per year by the time he/she reaches age 62.
- Overall impact: $83,000 loss by age 62.
- An O-5 retiring today with 20 years of service would see an average loss of over XXX per year by the time he/she reaches age 62.
- Overall impact: $125,000 loss by age 62.
How COLA is Determined
The cost-of-living-adjustment is determined by the Bureau of Labor Statistics’ Consumer Price Index (CPI-W). It is based on the percentage increase of the CPI-W from the 3rd quarter of the previous year versus the current year’s 3rd quarter.
Veterans who retired during the current calendar year will receive a temporary partial COLA due to already receiving a military pay raise in January.
- The COLA increase is only set at the CPI-W if the increase is less than 2 percent.
- If inflation is between to 2 to 3 percent than COLA is set at 2 percent.
- If the CPI-W is greater than 3 percent than COLA is set at 1 percent below the CPI-W.