Legislation recently introduced in the Senate has the potential to increase the annual cost of living adjustment (COLA) for retired federal employees under the Federal Employees Retirement System (FERS).
The bill is companion legislation to the Equal COLA Act which was introduced last year in the House by Congressman Gerry Connolly (D-VA). The Senate version of the bill (S. 4221) recently introduced is sponsored by Senator Alex Padilla (D-CA).
Both bills would change existing law so that federal retirees under FERS always get the same COLA that retired federal employees under the Civil Service Retirement System (CSRS) get.
How the FERS COLA is Calculated
Under current law, FERS retirees sometimes wind up receiving a smaller annual COLA increase than CSRS retirees due to how the law calculates COLAs under the two retirement systems.
This has become more of a hot topic since inflation began rising rapidly last year. The 2022 COLA was 5.9%, and the 2023 COLA looks like it is going to be even higher with one recent estimate putting it at nearly 9%.
This is how the FERS COLA is calculated:
- For FERS or FERS Special benefits, if the increase in the Consumer Price Index (CPI) is 2 percent or less, the COLA is equal to the CPI increase.
- If the CPI increase is more than 2 percent but no more than 3 percent, the Cost-of-Living Adjustment is 2 percent.
- If the CPI increase is more than 3 percent, the adjustment is 1 percent less than the CPI increase.
- The new amount is rounded down to the next whole dollar.
The table below illustrates this:
|If the CPI is:
|Then the COLA is:
|COLA = CPI increase
|> 2% and <= 3%
|COLA = 2%
|COLA = CPI – 1%
Retired federal employees under CSRS get the full COLA.
With 2022 inflation quickly rising, some federal employees may be thinking more seriously about retiring to take advantage of a higher COLA next year. However, it is important to note that federal retirees must have been receiving an annuity payment for a full year to get the full COLA amount. For more information, see Predicting the 2023 COLA and How to Avoid the Surprise of a Lower Annuity Payment. Also check out this short video illustrating the COLA calculation process and to learn how when you retire can impact your annuity payments.
Why Do Federal Retirees Under FERS Get a Different COLA?
Although supporters of the legislation decry the current system as being unfair, Congress set it up this way on purpose when FERS was created back in the 1980s. That is because federal employees under FERS get benefits that CSRS employees did not get, so the idea was that having the full COLA in years when inflation ran higher was not necessary since the other benefits would pick up the slack.
What are those benefits?
Under FERS, federal employees get the following:
- Matching funds from the federal government (up to 5%) to invest in their Thrift Savings Plan (TSP) accounts
- Social Security
- Annuity payments in retirement
The Social Security and TSP benefits are portable, meaning that if a federal employee leaves his or her job, the benefits go along and are not lost. In other words, FERS was designed to allow federal employees to leave public service and not lose their benefits.
OPM describes the benefits under FERS as follows:
FERS is a retirement plan that provides benefits from three different sources: a Basic Benefit Plan, Social Security and the Thrift Savings Plan (TSP). Two of the three parts of FERS (Social Security and the TSP) can go with you to your next job if you leave the Federal Government before retirement. The Basic Benefit and Social Security parts of FERS require you to pay your share each pay period. Your agency withholds the cost of the Basic Benefit and Social Security from your pay as payroll deductions. Your agency pays its part too. Then, after you retire, you receive annuity payments each month for the rest of your life.
Under CSRS, federal employees are eligible for a higher COLA and annuity in retirement, but they do not get matching funds to invest in the TSP. CSRS employees do not receive Social Security as part of their retirement plan. Some CSRS employees do receive Social Security based on employment other than having worked for Uncle Sam but it is not an integral part of the CSRS plan.
Over time, the return on the TSP investments can compound significantly if invested well, potentially far outweighing the reduced annuity under FERS. If, for example, a federal employee were to invest $1,500 per month into the TSP stock funds and earn an 8% average annual return, a conservative figure since the S&P 500 has averaged about 10% per year since its inception, he would wind up with over $2,000,000 after 30 years. Although the stock market has become more volatile recently, there are still over 100,000 federal employees who have become millionaires using the TSP as of the most recent count.
It is for these reasons that Congress decided to structure FERS and its COLA calculation the way that it did. It remains a hotly debated topic, however, and in an election year that also is a time when inflation is rising rapidly, some lawmakers who are up for reelection in November see it as an opportunity to curry favor from voters.