Up next in 10
What Are the Differences Between the COLA and Pay Raise?
Aug 21, 2025
Do you know the difference between the annual COLA and pay raise? Are you sure? The topic is often a point of confusion for federal employees and retirees. This video explains the key differences and some common misconceptions between the two. Related Articles What is the Difference Between the COLA and Pay Raise? https://www.fedsmith.com/2024/10/16/difference-between-cola-and-pay-raise/ 2025 COLA Finalized: How Much Is It and Who Will Receive It? https://www.fedsmith.com/2024/10/10/2025-cola-finalized-how-much-is-it-and-who-will-receive-it/ Chapters 0:00 Introduction 1:27 How COLAs Are Calculated 2:33 FERS/CSRS COLA Differences 3:37 Pay Raise 4:50 Common Misconceptions 5:52 Conclusion
View Video Transcript
0:00
Do you know the difference between a
0:01
cola and a pay raise? You might say,
0:03
'Yeah, of course. That's simple, but are
0:06
you sure? I bring this up because it's a
0:08
common point of confusion among federal
0:10
employees and retirees. So, today I'm
0:13
going to break down the differences
0:14
between these two. Stay tuned. Hey
0:17
everyone, Ian Smith here with
0:18
fedsmith.com.
0:20
As I mentioned, the difference between a
0:22
cola and a pay raise is oftentimes a
0:25
point of confusion among um current
0:28
federal employees and federal retirees.
0:31
And I understand why it is a confusing
0:34
topic. The cola is very confusing, the
0:37
calculation, the way it's calculated.
0:39
But I find this topic very interesting.
0:41
And so I wanted to get into it with you
0:43
and just go over the key differences
0:45
between the two.
0:47
So, what are those key differences?
0:51
COLA, that stands for cost of living
0:53
adjustment, and that only applies to
0:57
retired federal employees
0:59
as well as social security recipients.
1:02
So, it does not apply to current federal
1:04
employees at all. It's determined by an
1:07
automatic formula and it's based on the
1:10
CPIW
1:11
which stands for consumer price index
1:13
for urban wage earners and clerical
1:16
workers.
1:18
Now the pay raise on the other hand that
1:20
applies to current federal employees not
1:22
retirees and it's determined by Congress
1:26
and the president each year.
1:30
Now how the cola is calculated
1:33
that as I mentioned is done by an
1:36
automatic formula and it's based on the
1:38
difference in the averages of the CPIW
1:42
for the last three months of the
1:43
government's fiscal year which is July,
1:46
August and September for the last couple
1:48
of years. In 2025 for example there was
1:51
a 2 and a half% cola. This table shows a
1:54
breakdown of that formula being applied
1:57
to the last two years to arrive at the
2:00
2025 cola calculation. I'm not going to
2:02
go deeply into the details of this
2:05
formula. I suspect it'll just make your
2:07
eyes glaze over for most of you. But you
2:11
see here, these are the CPIW readings.
2:14
Averages are taken and then the
2:17
difference in those averages is what
2:18
arrives at the cola. Also, there can be
2:21
years without a cola if there is no CPI
2:24
increase. That's something to keep in
2:26
mind as well. Um, the important thing to
2:29
note though is that it's an automatic
2:32
formula done every year. What can make
2:34
it even more complex is that not all
2:37
retirees get the same cola. If you're
2:40
under the civil service retirement
2:42
system, that's CSRS, you get the full
2:45
cola regardless of what it is. Under
2:48
FURs, however, that's the federal
2:49
employees retirement system. The COLA
2:52
can be capped or reduced depending on
2:55
the amount of it. This table shows a
2:58
breakdown of that. If the COLA is less
3:01
than or equal to 2% under FURs, then you
3:05
get the full cola. If it's greater than
3:08
2% but less than or equal to 3%, then
3:11
it's capped at 2%. And if it's greater
3:14
than 3% then the cola is reduced by 1%.
3:19
There are some other exceptions to this
3:20
but those are the general overall
3:22
guidelines for applying the cola to furs
3:26
and CSRS. I'll be sure to include some
3:28
links in the description below to some
3:30
of our other articles on this topic for
3:33
those of you who'd like more details.
3:37
So that's the cola. But what about the
3:39
pay raise? The COLA is an automatic
3:42
formula as I said and it's not subject
3:44
to politics. The pay raise on the other
3:46
hand is done by a political process
3:50
every year and it is subject to politics
3:53
as I mentioned is determined by the
3:54
president and congress
3:57
and payraises are part of the federal
4:00
budget process. Typically what happens
4:02
is the president will set the pay raise
4:05
and Congress usually doesn't get
4:07
involved. They stay silent on the issue.
4:09
However, Congress can get involved and
4:12
they can override the president's
4:13
proposed pay raise with legislation that
4:16
sets it at a different amount. That
4:19
sometimes happens, but it's fairly
4:20
unusual. Ultimately though, the pay
4:24
raise is finalized in December when the
4:26
president issues an executive order. And
4:30
once that happens, then the Office of
4:32
Personnel Management will issue pay
4:34
tables for the coming year spelling out
4:38
the amounts of the pay raise applied to
4:41
uh the general schedule payables. And it
4:44
shows what the annual salaries for each
4:47
of the general schedule grades and steps
4:49
are for the the coming year. And so
4:51
given the differences between the two,
4:53
you'll hear common misconceptions or at
4:56
least misstatements. you sometimes I'll
4:59
hear someone say something like
5:02
federal employees didn't get a COLA this
5:04
year or the cola for federal employees
5:08
isn't fair because it's too low
5:10
something like that and that's not
5:12
accurate because again the cola only
5:14
applies to uh federal retirees not
5:18
current federal employees it's more
5:20
accurate to say pay raise you might also
5:22
hear somebody say something like it's
5:24
not fair that retirees got a 2 and a
5:27
half percent cola this year and our
5:29
raise was only uh 2% or whatever the the
5:33
numbers might be in any given year.
5:35
Well, again, they're completely
5:37
different things. They're mutually
5:40
exclusive. So, one really has nothing to
5:43
do with the other. The cola, like I
5:46
said, is an automatic process. The pay
5:48
raise is set by the president in most
5:51
most of the time. So, those are the key
5:53
differences between the two. I hope you
5:55
found this quick video to be helpful.
5:58
Please be sure to like and subscribe to
5:59
the channel for more updates that impact
6:02
you and your career. And also visit the
6:03
fedsmith.com website for more of our
6:06
news articles. Have a good day.
#Government