Proposed Cuts to Your Retirement COLA

Recent recommendations in Congress could have a negative impact on the cost of living adjustment (COLA) for federal employee retirees.

Federal retirees and those who may become federal retirees, please note: page 24 of the recently released “Honest Solutions: Fiscal Year 2012,” by the Republican Study Committee, has news for you. The committee is offering two recommendations for saving money, each of which has a negative impact on retirees.

Base Federal Pension Cost Of Living Adjustments On

An Accurate Inflation Measurement

Federal retirees currently receive inflation protection for their federal pensions based on the CPI-W (the consumer price index for urban wage earners and clerical workers) instead of the CPI-U (the consumer price index for urban consumers). The CPI-W, according to most analysts, overstates the actual level of inflation in the economy, at a higher cost to taxpayers. This budget would more accurately measure inflation for federal retirees by basing it on the CPI-U, resulting in a savings of $300 million in FY 2012 and $24 billion over ten years.

It is true that the CPI-U, which covers 87% of the total population (vs. 32% for the CPI-W), is a broader-based and thus more equitable yardstick. However, the authors failed to note that FERS employees already experience a sharp cut in their COLA increase! With an inflation rate of up to 2.0%, they receive the actual amount of the COLA, but if the CPI is more than 2.0% and equal to or less than 3.0%, they get just 2.0%. And if the CPI exceeds 3.0%, a full percentage point is subtracted from the COLA increase.

Also, the CPI-U since February of 2010 is only two tenths of one percent less than the CPI-W for the same period – 2.1% vs. 2.3%. Is the long-term difference really enough to justify an estimate of $24 billion savings over ten years? I am skeptical.

There’s always the CPI-E. The CPI-E is oriented to the life style/expenditures of the elderly. Relative to retired (i.e., older) persons, it is more “ACCURATE.” However, it yields a slightly higher increase than the other two CPIs, so nobody wants to change to this, now do they? CPI-E may be more accurate, and more appropriate, but this is not really what the committee is looking for.

In view of the above, it does not seem unreasonable to say our friends at the committee are recommending a comparatively small cut when a much larger cut is already in place.

Defer Cost Of Living Adjustments For Early Retirees

Until Age 62

Currently, federal employees retiring prior to age 62 are eligible for cost-of-living adjustments (COLA). This existing policy provides COLAs well before a conventional retirement age. The RSC budget prevents early retirees from receiving COLAs until they reach age 62. This would result in a savings of $17 billion over ten years. This is based on the National Commission on Fiscal Responsibility and Reform’s recommendation to put limits on this program.

(An “early” retiree is one who does not qualify in terms of age and service time, and thus must be granted a VERA, or must use the MRA+10 mode of retirement. Contrary to the commission’s apparent belief, simply being under 62 years of age does NOT make a retiree “early.”)

The real problem with this recommendation is that it proposes to remedy a virtually non-existent condition! That is, under current law, federal retirees under 62 already receive -0- COLA prior to age 62! (Unless you are considering CSRS retirees,
but they are only 15% of the workforce.)

CSRS retirees do receive COLA increases prior to age 62. Is this what the commission meant? Notice that neither of the above recommendations mentions CSRS or FERS.

The CSRS retirement system has been essentially dead since 1983. No new
employees have entered CSRS in the past 28 years or so. CSRS employees comprise just 15% of active federal workers. If this is, in fact, the group the commission meant to target, how many CSRS retirees can there be who are under age 62? As members of a
dead system, the number of CSRS employees – retired or not – is steadily dwindling.

This is just the author’s opinion, but in view of the economic climate, increasing longevity and the (probable) increase of the Social Security retirement age, it will not be a hardship for CSRS retirees to wait for COLA increases until they become 62. FERS employees are already in this condition.

At this point, the question is: when would the proposed change take effect and who will it impact? If it cuts payments to current CSRS retirees, it will be painful but it will “save” more money. On the other hand, delaying the application until current CSRS employees retire will be more fair, but savings will be reduced sharply, because of the relatively small numbers of CSRS employees who will be under 62.

Either way, it appears the estimated $17 billion in “savings” is quite an over-estimate. So much for “Honest Solutions.”

About the Author

Robert Benson served 35 years in various Federal agencies, as both a management analyst and IT specialist. He is a graduate of Northwestern University.