The new math for COLAs

There's a New Math on what we might expect for retired feds and their COLAs.


Many Moons ago when I first went on the federal beat, I was assigned to cover a national convention of a group of federal retirees. This was when everybody was under the old Civil Service Retirement System. It was, still is, considered the best rank-and-file retirement program anywhere. Although only about one-third of those who joined the government actually retired under CSRS, those who did were set for life. A starting annuity equal to 60 to 70 percent of final salary was commonplace. Those who lasted 41 years, and many did, got 80 percent of final pay. Linked to inflation. No pension program in the country equaled it. Then or now.

The highlight of the convention came when the association president announced that the official rate of inflation was about 9 percent. That was during one of the painful oil embargoes of those years, when prices were soaring. The crowd cheered because it meant their next COLA (Social Security, too) would be a whopping 9 percent. (For purposes of comparison the last COLA—January 2021—was 1.3 percent.)

But that was then. This is now. Most current federal workers, nearly 98 percent, are now not under CSRS. They will retire under the much less generous FERS program. Less costly, to the government, because people who retire under FERS often get “diet” COLAs. Less than their CSRS counterparts, for sure. Any FERS COLA of 2 percent or more is subject to the diet rule. For instance, in 2019 the COLA was 2.8 percent for CSRS retirees, but limited to 2 percent for FERS retirees. And it gets worse when retires start out with less and fall further and further behind, the longer they are retired. The 2012 COLA was 3.6 percent for CSRS, but only 3 percent for those under FERS. And it can and probably will get worse for FERS participants as the nation climbs out of the pandemic. In 2009, the cost of living boost, coming after the Great Recession, was 5.8 percent for CSRS but only 5 percent for FERS. Get the picture?

In any coming periods of high inflation, retirees will no longer cheer higher COLAs because most of them will get less. And fall further behind each year.  

The FERS folk, now the majority of future retirees, will fall behind each year. Prices will go up but the diet COLA won't keep pace. Many current and future feds will spend as long in retirement as they did while working for Uncle Sam. That means that over time—and not much time at that—retirees will fall well behind the pace of inflation. The index used to measure living costs and determine current and future COLAs could be less each year. By some estimates the value of the monthly FERS annuity will shrink in value as much as 30 percent. All at a time of life when most recipients will have much higher medical costs. Even with the best FEHBP plan.

The solution is simple. Getting there, not so much.

The fix is for the government to either eliminate the diet COLA formula. Or switch to a different government CPI (consumer price index) for all retirees.

What are the odds of either happening?

Not great.

There is little interest in Congress in changing the formula by either eliminating the diet COLA formula, or switching to one of the CPI indexes that more accurately reflects rises in the actual cost of living and their impact on FERS retirees.

If all federal groups went all out in pushing for it, a COLA equity plan could (with a capital C) be enacted. But that could take years. Years in which FERS retiree income would/will fall further behind the pace of inflation.

Next time any of us attend a group meeting of retirees, it is likely the crowd will boo (for good reason) any inflation-catch up that is over 2 percent. Because everyone present will get less.

So do the math. See what it could do to your retirement income in the near future. And worse, over the long haul.

Do the math.  And if you are still working, kick in more to your TSP. Because you are definitely going to need it !!!

 

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