Legislation has been reintroduced that would increase the cost of living adjustments (COLA) for some retired federal employees in some cases.
The Equal COLA Act (H.R. 866) was reintroduced by Congressman Gerry Connolly (D-VA). It has been introduced a number of times in the past but has ultimately failed to become law. It was last introduced in 2022 under the previous session of Congress.
The bill would set the calculation of COLAs under both the Civil Service Retirement System (CSRS) and the Federal Employees Retirement System (FERS) to be the same regardless of the size of the annual COLA in any given year. Connolly calls it bringing “equity” to how the COLAs are calculated under the two retirement systems.
“This two-tiered system fails to protect FERS retirees who are living on a fixed income,” said Connolly. “This legislation will rectify this unfair system and ensure these dedicated public servants are protected throughout their retirement.”
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 was particularly evident the last couple of years with inflation rising rapidly which led to the largest COLAs for federal retirees since the early 1980s. The 2022 COLA was 5.9%, and the 2023 COLA came in at a whopping 8.7%. Probably not by coincidence, Connolly now wants to give current federal employees an 8.7% pay raise in 2024.
When the COLAs are this large, FERS retirees receive a smaller COLA than federal retirees under CSRS, thereby increasing the short-term appeal to voters of a bill such as this one.
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:|
|<= 2%||COLA = CPI increase|
|> 2% and <= 3%||COLA = 2%|
|> 3%||COLA = CPI – 1%|
Retired federal employees under CSRS get the full COLA.
Why Do Federal Retirees Under FERS Get a Different COLA?
While it’s easy for lawmakers to curry favor from voters in their districts by handing out more money, it is important to understand why the system was designed to give federal retirees under FERS a smaller COLA in some cases.
Congress set it up this way on purpose when FERS was created back in the 1980s because federal employees under FERS get benefits that CSRS employees do 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.
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 don’t get left behind with the job. 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.
For instance, if a federal employee invested $1,500 per month into the TSP stock funds and earned an 8% average annual return, a conservative figure since the S&P 500 has averaged nearly 12% per year since its inception, he would wind up with over $2,000,000 after 30 years.
Anyone who doubts this should know that there are plenty of federal employees who are millionaires because of their TSP accounts. Even with the lackluster performance of the stock market in 2022, there are still almost 77,000 TSP millionaires as of the latest count.
And the one thing they have in common? They have been investing in the TSP for a long time. The average years of contributions made by the federal employees with over $1 million in their TSP accounts is almost 30 (29.58 to be exact).
An extra 1% COLA in some years won’t come close to making somebody a millionaire. Nevertheless, convincing people they are getting shafted by being participants in one system versus another is an easy way for politicians to score political points.