From COLA to Diet COLA: What the Budget Proposal Means for Your Retirement

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By on May 31, 2017 in Retirement with 0 Comments

Close up of $20 bill in a person's hand in front of a drink, illustrating the concept of paying for a beverage

Imagine planning for months to go to your favorite restaurant. You are dreaming about your favorite meal, that oh so decadent desert and your preferred bottle of…COLA. (work with me).

However, when you get there you are told the menu changed a few moments before you arrived. Your favorite dish has been replaced with humus, desserts have been eliminated and they no longer serve alcoholic or sugar laden drinks. Your snarky server smiles and proudly announces, “We do have diet cola and sparkling water.”

With a slight quiver in your lower lip, all you can manage is, “I don’t want diet cola; I want the meal I was supposed to get!”

A Fair Solution

I agree there is need for reduced spending, lowering taxes and creating more and better jobs. Yet, I convulse at any proposals that attack feds’ financial LIBERTY and don’t provide a solution that is JUST.

I know, I can almost hear the scathing attacks on the contradictions of my naïve and gullible attitude. “You can’t make an omelet if you don’t break a few eggs.” Interpretation – You must make spending cuts and also cut taxes to make all those other wonderful economic promises happen.

It’s Only a Proposal

We should understand that this budget proposal is just that, a proposal. It will be altered or completely replaced…probably. Yet, I do believe this proposal is a clear sign of bad intentions focused on federal employees’ benefits.

We all must come to grips with the financial hole that our nation is in: $20 TRILLION dollars in debt. Recently, annual deficits have been in the $500 BILLION range. These numbers do need to be addressed, immediately. As rates rise, our ability to even pay the interest on our debt puts a huge strain on the entire nation. So, yes… I get it.

Liberty has been a long valued and pursued standard in our country. If you understand Liberty is a synonym for freedom, as justice is for fairness, the question creeps in: is there liberty and justice for long time feds in this budget proposal?

Proposed Retirement Changes

There are 4 major retirement benefit items in this proposal:

  • FERS employees pay more for their pension.
  • Modify pension calculations from using a High-3 (year income) to a High-5 (year income).
  • Eliminate the Supplemental Retirement.
  • Eliminate annual Cost of Living Adjustments (COLA).

Proposed COLA Changes

For now, let’s focus on the COLA challenge.

For current and past FERS employees, this proposal asks for complete elimination of the COLA. For CSRS it asks for a .5% reduction each year from the amount they would have otherwise received.

For years, many of us focused on federal retirement preparations have foretold of a future when there could be major attacks on federal benefits. The President’s budget proposal is, at the very least, a warning that changes may be imminent.

This budget proposal estimates a $63 billion reduction in federal retirement spending over the next 10 years, a large sum of money for sure. Averaged over 10 years, this projected savings would be $6.3 billion annually. Our nation’s anticipated 2017 deficit (based on this budget proposal) is $603 billion.

The savings created by this proposal would harm virtually every past, current and future federal employee, many of whom planned on promised benefits for their retirement. Yet the proposed savings would only account for a sum that would be comparable to a 1% reduction in the annual deficit. ($6.3 billion ÷ 603 billion = 1.04%)

That seems like a massive cost to all feds that would result in only minimal returns. Is it worth it? Is there a better approach?

Quick example

A retired FERS employee receives $35,000 (from his federal pension/annuity) during his first year of retirement.

This amount, combined with other retirement income sources, is enough to pay monthly obligations and allows him $5,000 per year excess. During the next 5 years, inflation rates are equal to 3% annually, so our FERS employee then would need $40,574 (from his federal pension/annuity) to maintain his financial status quo. 5 years into retirement (without a COLA), he would have gone from having a $5,000 annual surplus to falling short by $574 annually. How devastating would this be in 10 years, 20 years and beyond?

Justifications

One rationale thrown around for such drastic measures is that the average federal employee’s retirement is better than the average American’s. I couldn’t agree more. However, I have a problem with any concept that attempts to play down to the lowest common denominator. Shouldn’t the goal be to improve everyone’s golden years instead of ensuring no one enjoys a financially attractive retirement?

Another premise quoted from this budget proposal, “Viewed in the context of the broader labor environment, the Administration be­lieves the implementation and phasing in of these changes will not impact the Federal Government’s recruiting and retention efforts.” (emphasis added)

Did I read that right?

I am not at all ashamed to say, I have drunk the “lower taxes = more and better paying jobs” kool-aid. It just makes sense to me. But, I must ask, how can both ideas be right?

If budgetary changes are going to encourage more and better paying jobs in the private sector, how can the federal government expect to keep and attract good employees, after demolishing their highly-coveted benefits? I’m not thirsty enough to drink that kool-aid.

A Better Solution

Allow current feds to retire with their dignity and the benefits they were promised. Court new employees with the contemporary hi-tech skills needed today. Offer them good pay and a continued array of outstanding benefits, but with a modified retirement plan to which they make greater contributions.

Federal employees are not looking for more on their retirement menu than they were promised throughout their careers. They simply wish to sit down at retirement, and enjoy the freedom (Liberty) to retire comfortably, a side of fairness (Justice) and the COLA they were promised, the non-diet one.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.  Investing involves risks, including the loss of principal.  No strategy assures success or protects against loss. Silverlight Financial, Infinity Financial Services and its affiliates do not provide tax, legal or accounting advice. This material is not intended to provide, and should not be relied on for tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction. For a list of states in which I am registered to do business, please visit www.silverlightfinancial.com .

Silverlight Financial donates free/no obligation Federal Retirement Readiness Reviews. These reviews culminate with a no cost phone consultation with founder, Randy Silvey. To personally request your FRRR email: [email protected]

© 2019 Randy Silvey. All rights reserved. This article may not be reproduced without express written consent from Randy Silvey.

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About the Author

Randy Silvey is the published author of You FIRST, Federal Employees Retirement Guide, one of the bestselling books of its kind on Amazon and Kindle. For over 14 years, he’s been educating and guiding Feds in pursuing wealthier retirement lifestyles. Randy can be reached at 816-524-1515, [email protected] or visit his website at www.silverlightfinancial.com. Securities offered through Infinity Financial Services. Member FINRA/SIPC.

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