2020 Pay Raise Unfair to Retirees?

Which group comes out ahead in determining a COLA or the annual federal pay raise?

Every year, when the percentage of any annual pay raise for current federal employees for the next year is announced (usually in late December), questions and comments from readers start appearing. This year is no exception.

Here is one typical example. The day after an average pay raise of 3.1% for current federal employees appeared to be the most likely raise, these comments were quickly submitted by a reader:

So retirees really do get screwed [by a smaller increase than current federal employees]… Sad that working for the federal Govt for 30 yrs and [we] really do lose benefits.

This individual was referring to the difference between the 2020 pay raise for current federal employees and the cost of living adjustment (COLA) for federal retirees which will be 1.6% next year.

It is human nature to focus on the most recent events. For 2020, the COLA will be a smaller number than the average federal employee pay raise.

But, going back a few years, the COLA has often been higher than the annual federal pay raise. Similar comments to the one above always appear from current federal employees when the COLA is larger than the pay raise.

Here is how the COLA and pay raises compare over the past few years:

Federal Pay Raise %COLA %
2009 3.9 5.8
2010 2 0
2011 0 0
2012 0 3.6
2013 0 1.7
2014 1 1.5

The federal pay and retirement systems are complex and confusing. That is understandable as there are are various systems with considerable differences.

A common source of confusion is the difference in how decisions are made on any payment increases for current federal employees and federal retirees each year (if they are increased at all).

2020 Pay and COLAs

Prior to 1975, Social Security benefit increases were set by legislation similar to how federal employee annual pay raises are now set. Since 1983, COLAs have been effective in January with benefits payable for December. The next year’s COLA is calculated using a complex formula that is used to determine the increase without having a Congressional vote.

In 2019, the annual cost of living adjustment (COLA) was 2.8%. In 2020, it will be 1.6%. The average federal pay raise in 2019 was 1.9% and the COLA was 2.8%.

The pre-determined formula for calculating the COLA for the coming year is not a political decision. It is based on the cost of living as measured by the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W).

So, the annual COLA and the federal pay raise are usually different amounts but are determined in different ways. Comments from each group vary according to which group came out ahead of the other in a specific year.

Unfair to Current Employees?

In 2019, some current federal employees commented it was unfair that retirees would receive a larger increase through a COLA than current federal employees received through the political process.

Ultimately, current federal employees received an average pay raise of 1.9% (some received more or less than that). That was less than the 2.8% COLA for federal retirees but certainly better than no raise at all which had originally appeared to be the most likely outcome.

In other words, there are those in a group that will always be unhappy with the outcome as either retirees or current employees will frequently receive a smaller increase.

What About Locality Pay?

The locality pay rates will be determined in the next few days. Based on recent history, federal employees in areas such as Washington, DC or San Francisco will receive a higher increase in pay over other areas. In 2019, federal employees in the Washington, DC and San Francisco, CA areas received the largest pay raise as a result of locality pay.

Some federal retirees quickly raised this question: “When do I receive the locality pay raise in my check?”

The answer is simple. If you are a retired federal employee, you do not receive a locality pay raise in your retirement check. The locality pay system only applies to current federal employees and not those who are retired.

And, a related comment that is sometimes stated: “It is unfair that retirees do not get a locality raise because I live in a high cost of living area and our expenses are higher than in other areas.”

The reality is that when a federal employee’s annuity payment is calculated, the payment will probably be a little higher when the employee is working in an area with higher locality pay. Since that is where the job is located, there may not be an option for moving to a lower-cost area.

Once a person has retired, there are more options available. Some federal employees have worked for several years in a higher paying job to obtain a higher retirement payment and then moved to an area with a lower cost of living after retirement.

So, unfair or not, federal employees who are retired and Social Security recipients do not receive a locality pay raise. That benefit is only applicable to some current federal employees.

Keeping the Terms Straight

The easiest way to sort through the bureaucratic thicket is to remember that a COLA is only applicable to federal retirees and Social Security recipients. A pay raise is only applicable to current federal employees.

And, finally, locality pay only applies to current federal employees.

This is an explanation of how the system works. Each reader will need to decide which group gets a better deal.

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