Legislation Would Boost COLAs for Some Federal Retirees

Another attempt is being made to give retired federal employees under both FERS and CSRS the same COLAs.

Legislation has been reintroduced in the House that could increase cost of living adjustments (COLA) for some retired federal employees.

The Equal COLA Act (H.R. 491) aims to ensure that federal retirees receive the same annual COLA increase regardless of whether they are under the Federal Employees Retirement System (FERS) or Civil Service Retirement System (CSRS). Currently, there’s a disparity in the calculation of COLAs under the two systems, leading to FERS retirees sometimes receiving a smaller increase than CSRS retirees.

The COLA calculation under FERS currently is computed as follows:

  • 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 always get the full COLA.

Connolly, however, says this is unfair. “The economic conditions that necessitate cost-of-living adjustments affect retirees in the same way, whether they are on CSRS or FERS. It is high time we recognized that reality. The Equal COLA Act will rectify the unfair two-tiered process we have in place now and will bring parity to a federal retirement system that has unjustly penalized certain retirees for too long,” he said in a statement about the bill.

His legislation would ensure that federal retirees under both retirement systems always get the same COLA increase.

The bill has been introduced four times in the past but has never become law.

CSRS vs. FERS

It is important to understand the reasons why Congress originally decided that retired federal employees under FERS would sometimes receive smaller COLAs.

The Civil Service Retirement System (CSRS) is an older retirement system for federal employees. The Civil Service Retirement Act, which became effective on August 1, 1920, established this retirement plan.

The Federal Employees Retirement System (FERS) became effective on January 1, 1987.

This is what the Office of Personnel Management said about the CSRS system when FERS was being introduced in 1987:

(CSRS) is a very good retirement system. But, it was designed many years ago for a workforce that usually made a career out of working for the Federal Government. CSRS provides excellent benefits to employees who retire from the Federal workforce after many years of service.

In general, CSRS will be better if you know for sure that you will retire from the Federal Government after a long career—20 or 30 years. But what if you’re not sure what the future holds? Maybe you’re not planning to spend your entire career with the Federal Government, or you may want to retire early before you have 30 years of service. In either case, FERS may be the retirement plan you want.

FERS Transfer Handbook: A Guide to Making Your Decision

CSRS was phased out starting in 1987. There are very few current federal employees who are still working under the CSRS system.

Why Do CSRS Employees (Sometimes) Receive a Better COLA?

As explained above, federal employees who retire under CSRS will receive a larger COLA some years than FERS employees receive. This enables CSRS retirees to keep up with inflation better than FERS, at least with regard to their pension payments.

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.

The FERS system was designed to make it easier to leave federal service and to take a job with another organization. CSRS was designed to provide a retirement plan after a long career of working for the federal government. The federal retirement system was described as a system with “golden handcuffs.” It was designed on the assumption that a federal employee would remain a federal employee until dying or retiring.

When CSRS was implemented in 1920, many Americans spent their entire careers working for one employer (or on their own farm). Companies used to have retirement plans similar to CSRS (often without a COLA) and CSRS followed a similar system.

The FERS system was based on different assumptions and a different model. FERS employees receive Social Security and the full Social Security COLA every year. So, while they do not receive the full COLA for their pension or annuity, they do receive the full COLA for Social Security.

FERS employees also have access to invest for their future retirement through the Thrift Savings Plan (TSP) for their entire career with the federal government. The federal government provides an extra matching amount that goes into the TSP to provide a greater income stream during retirement.

The TSP gives employees a chance to invest money for future retirement income into funds that they select. Employees who invest in the TSP often have a substantial amount of money as a result of having invested wisely in the TSP.

There is not a guaranteed rate of return on TSP investments, however, investing in stock index funds and leaving it over a long period of time has always provided a good rate of return for investors.

Unlike contributions to a federal annuity, federal employees investing in the TSP control this money and how it is invested. Each individual impacts how much the rate of return will be upon retiring based on his or her selection of funds receiving their investment dollars.

If a federal employee leaves federal service before retiring, the Social Security benefit and the TSP account stays with that person.

The extra COLA amount for CSRS employees is the result of Congress having decided the benefit of the TSP investments, including a matching amount provided by the federal government for an employee who invests in the TSP, and the additional income provided during retirement by the Social Security system justified a lower COLA than the one provided for CSRS employees.

About the Author

Ian Smith is one of the co-founders of FedSmith.com. He has over 20 years of combined experience in media and government services, having worked at two government contracting firms and an online news and web development company prior to his current role at FedSmith.