Reduced COLA Payments for Federal and Military Retirees in Your Future?

Would you mind a reduction in your CSRS annuity of about $3900 over ten years? Would you mind a reduction of about $1000 less in your FERS annuity during the same time period? If so, you may want to read a new proposal being floated that could have an impact on your retirement income.

How can Congress cut the federal deficit by reducing federal spending?

The deficit commission came up with a number of recommendations which we have outlined in previous articles. And, while President Obama indicated at the time the commission was formed that he would be standing with the members of the commission when their findings were announced, his enthusiasm for the recommendations has been somewhere between tepid and non-existent. (See Deficit Commission Recommends Freezing Federal Salaries, Changing Retirement Calculations and Commission Proposes “High-Three” to “High-Five” for Retirement, Pay Freeze and Changes to FEHB for Federal Employees)

But that does not mean that the recommendations have gone away or that other options are not going to be considered. Some of these options will impact the federal workforce and, quite possibly, the future retirement income of federal employees and other Americans as well.

Here is one example of a proposal that has been written by the Congressional Budget Office (CBO).

One section of this report is entitled: “Base Cost-of-Living Adjustments for Federal Civilian and Military Pensions and Veterans’ Benefits on an Alternative Measure of Inflation.”

It will not surprise many readers to learn that the gist of this proposal is how to reduce the COLA adjustments and require less future spending increases by the federal government.

Cost of Retirement Benefits

“In 2010, the federal government paid $69 billion in pension benefits to 2.5 million civilian retirees and their survivors, as well as $51 billion to 2.2 million military retirees and their survivors…Pensions paid under the Civil Service Retirement System (CSRS) are subject to annual cost-of-living adjustments (COLAs) that provide complete protection against increases in the CPI-W. Pensions paid under the newer Federal Employees Retirement System (FERS) are fully protected only when that increase is less than 2 percent per year.”

So, obviously, the federal government is spending a great deal of money each year on retirement payments in various forms. How can this amount of spending be reduced?

How to Save Money? Change The Formula

One way is to change the formula for paying future cost of living increases. The chained CPU (CPI-U) would, on average, grow 0.25 percent less than the existing formula for paying inflation increases.

0.25% less does not sound like a lot of money and, as a practical matter, it may not be a lot for many people. It would save the government a few billion dollars though.  Changing how the COLA is calculated would decrease mandatory government outlays by about $6 billion between 2012 and 2016 and by $24 billion from 2012 through 2021.

What does this mean in practical terms for those that receive these benefits? Here are the results:

On average, a federal employee retiring under the CSRS system would receive about $3,900 less over 10 years; a FERS annuitant would receive about $1,000 less. The average military retiree would receive roughly $3,000 less over 10 years, veterans’ disability compensation would be about $1,500 less, and veterans’ pensions would be about $1,200 less.

The Long-Term Impact

There are disadvantages to the proposal, of course. We have previously explained how the CPI-E would provide a larger benefit to federal employee retirees by counting more heavily the expenses actually borne by those who are retired and putting less emphasis on expenses not as likely to impact an older person or couple. The Congressional Budget Office is aware of this other option and that this other option would increase future government spending if it were to be enacted. (See Your 2010 COLA: Why Your Costs May Be Up But Your Income Goes Down)

Here is the downside to using the CPI-U as explained by the CBO:

“[T]he benefits received by retirees may decline over time in real terms under current law, and using the chained CPI-U would accentuate that decline. CSRS annuitants would be particularly affected because they are most dependent on their pensions: CSRS annuitants typically receive larger pensions than FERS annuitants do, but CSRS annuitants did not receive the matching contributions to their Thrift Savings Plan accounts for which FERS annuitants were eligible.”

The report is long. For those who care to read it, here it is.

There are other proposal contained within it that would impact all Americans. With the spiraling federal debt, and the unwillingness of previous elected officials to be willing to address the issue, resolving the debt problem is undoubtedly going to impact all of us in some way.

There is no certainty that this proposal to reduce future COLA payments will be enacted. But, keep in mind, it is likely that changes will be made to federal spending sooner or later and some of these spending initiatives are very likely to impact the federal workforce as well as those who do not work for the government sector.

With the under-employment rate at almost 19% for the American workforce, a gradual acceptance of the high unemployment more common in European countries than in the United States, and the growing dependence on government by many Americans that requires more government spending, it is unlikely that changes can be avoided in the federal budget. The tough political questions will be deciding where the cuts will be made, who will be impacted by the cuts, or whether those in leadership positions will continue to ignore the problem while it continues to grow.


About the Author

Ralph Smith has several decades of experience working with federal human resources issues. He has written extensively on a full range of human resources topics in books and newsletters and is a co-founder of two companies and several newsletters on federal human resources. Follow Ralph on Twitter: @RalphSmith47