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When Congress created the Federal Employee Retirement System in the ‘80s, one of the most notable changes was that future retirees would get smaller cost of living adjustments than participants in the old Civil Service Retirement System. CSRS and Social Security beneficiaries get COLAs that match inflation; FERS retirees get a smaller adjustment. That hasn’t been a...
When Congress created the Federal Employee Retirement System in the ‘80s, one of the most notable changes was that future retirees would get smaller cost of living adjustments than participants in the old Civil Service Retirement System. CSRS and Social Security beneficiaries get COLAs that match inflation; FERS retirees get a smaller adjustment. That hasn’t been a big deal over the past decade of low inflation, but obviously circumstances have changed. The National Active and Retired Federal Employees Association (NARFE) is urging Congress to pass the Equal COLA Act, which would get rid of the disparity between CSRS and FERS COLAs. To talk more about it, the Federal Drive was joined by John Hatton, Vice President for Policy and Programs at NARFE.
Jared Serbu: John, I think the right place to start off here is remind us how FERS COLAs actually work right now under current law.
John Hatton: OK, well, there’s a couple issues first, you don’t get them until you’re age 62. And then unless you’re in a special category, that you can call, it doesn’t address that particular issue. The second is, when it’s, when inflation is above 2%, you’re not getting the full COLA. So if it’s a 2.5%, you get 2%. If it’s 4%, you get 3%. It’s whatever it is minus 1%. Except for him that two to three range is just 2%. A few too many numbers in there for you. But a good example is last year and 2020, CSRS and Social Security got a 5.9% COLA, FERS got 4.9%. So it’s just a 1% reduction when inflation is high.
Jared Serbu: Right. Just out of curiosity, do you happen to know if there’s any particular policy rationale behind that one point reduction back when Congress first came up with it? Or was it just straight up deficit reduction?
John Hatton: Yeah, it was all part of a balance, you know, they tried to when they switched over to FERS and created FERS they tried to make it actuarially similar to CSRS. So if you take, you know, the first pension, and you add in Social Security, and you add in your TSP at a certain level, it was supposed to provide a similar payout overall, like in the aggregate to CSRS. So they had to tweak some numbers and move some numbers around. So I don’t think there’s a really good explanation for it other than they probably had to make the numbers work. So here’s a way to do that. We’re going to reduce that number down by 1%.
Jared Serbu: And what would the, what would the legislation we’re talking about here actually do?
John Hatton: It would just provide, it’s very simple, it would just provide, you know, the COLA, cost of living adjustment that’s based on the change in consumer prices, the exact way Social Security is provided, the exact way Civil Service Retirement System annuities are provided. So it’s just whatever that change in the consumer price index that the Bureau of Labor Statistics looks at from one year to the next is, that’s what the cost of living adjustment be, would be, and there would be no reduction.
Jared Serbu: And this legislation has been around before. This is not the first year it’s been introduced. What are you hearing, if anything from the Hill that would give you hope that this is the year?
John Hatton: You know, I think it’s an uphill battle. Obviously, inflation is higher now. So this is more of an issue that’s present. The other thing is that, you know, there’s a lot more FERS retirees, we’re coming up to close to, or more than a million FERS retirees based on the last statistical report that OPM put out. So we’re almost half and half of FERS and CSRS, so more people are affected by this. You know, this is the first time the Senate has introduced the bill, the Equal COLA Act has been around in the house, but they introduced it in the Senate. So we now have a bill in each chamber. And cosponsors keep on going up each Congress, but it is a little bit of an uphill fight for this Congress are in the short term. So we just need to keep on building support getting more people to contact their members of Congress about it, and then we might have some success, you know, getting it through.
Jared Serbu: Yeah. And besides inflation being a real thing this year, I mean, that that is a difference, right? I mean, I think the past decade or so the FERS and CSRS COLA increases were just about equal I think every year just because inflation wasn’t so much of a thing. But now it it does get you into a point where it does start to become a little bit of a fairness issue, right? Because it’s not just a one year hit. That’s, that increase is something you’ll never recover for the rest of your life, right?
John Hatton: Yeah, I mean one year have a lower cost of living adjustment probably isn’t going to do too much to you. But if you start getting two, three, four or five years in a row, you know, that compounds over time as well. And it really starts to add up over the course of a full retirement. It really does have more of an impact. I mean, obviously, it doesn’t come into play if inflation is lower, but when you get multiple years of high inflation, which, you know, we’re gonna see two years in a row and we might see a third. You know, it’s going to really depress the value of that annuity.