Effective on December 1 of each year, the Secretary of Defense shall increase the retired pay of members and former members entitled to that pay in accordance with paragraphs (2) and (3).

If in any case in which an increase in retired pay that would otherwise be made under paragraph (3) is not made by reason of law (other than any provision of this section), then (unless otherwise provided by law) when the next increase in retired pay is made under this subsection, the increase under paragraph (3) shall be carried out so as to achieve the same net increase in retired pay under that paragraph that would have been the case if that law had not been enacted.

Notwithstanding paragraph (3), if a member or former member participates in the modernized retirement system by reason of section 1409(b)(4) of this title (including pursuant to an election under subparagraph (B) of that section), the Secretary shall increase the retired pay of such member in accordance with paragraph (2).

Any increase in retired pay under this subsection shall be made in accordance with regulations prescribed by the Secretary of Defense.

Paragraphs (1) and (2) apply to a member or former member of an armed force who first became a member of a uniformed service before August 1, 1986, and whose retired pay base is determined under section 1406 of this title.

the price index for the base quarter of that year, exceeds

the price index for the calendar quarter immediately before the calendar quarter during which the member became entitled to retired pay.

one-fourth of 1 percent for each calendar quarter from the quarter described in paragraph (1)(B) to the quarter described in paragraph (1)(A).

The monthly retired pay of a member or a former member of an armed force who first became a member of a uniformed service before September 8, 1980, and who initially became entitled to that pay on or after January 1, 1971, may not be less than the monthly retired pay to which he would be entitled if he had become entitled to retired pay at an earlier date based on the grade in which the member is retired, adjusted to reflect any applicable increases in such pay under this section. In computing the amount of retired pay to which such a member or former member would have been entitled on that earlier date, the computation shall be based on his grade, length of service, and the rate of basic pay applicable to him at that time, except that such computation may not be based on a rate of basic pay for a grade higher than the grade in which the member is retired. This subsection does not authorize any increase in the monthly retired pay to which a member was entitled for any period before October 7, 1975.

Subject to subsections (d) and (e), the monthly retired pay of a member or former member of an armed force who first became a member of a uniformed service on or after September 8, 1980, may not be less, on the date on which the member or former member initially becomes entitled to such pay, than the monthly retired pay to which the member or former member would be entitled on that date if the member or former member had become entitled to retired pay on an earlier date, adjusted to reflect any applicable increases in such pay under this section. However, in the case of a member or former member whose retired pay is computed subject to section 1407(f) of this title, paragraph (1) (rather than the preceding sentence) shall apply in the same manner as if the member or former member first became a member of a uniformed service before September 8, 1980, but only with respect to a calculation as of the date on which the member or former member first became entitled to retired pay.

The percentage of the first adjustment under this section in the retired pay of any person, as determined under subsection (c)(1), (c)(2), (d), or (e), may not exceed the percentage increase in retired pay determined under subsection (b)(2) that is effective on the same date as the effective date of such first adjustment.

The term “price index” means the Consumer Price Index (all items, United States city average) published by the Bureau of Labor Statistics.

The term “base quarter” means the calendar quarter ending on September 30 of each year.

The term “base index” means the price index for the base quarter for the most recent adjustment under subsection (b).

The term “retired pay” includes retainer pay.