In 2024, the annual cost-of-living adjustment (COLA) for federal retirees is set to return to more modest levels after experiencing consecutive years of record increases. A key issue on the horizon is the push from various federal employee groups to eliminate the two-tiered system used to calculate the annual annuity increase.
A Shift from Recent Record Highs
The Social Security Administration made an announcement, stating that Social Security beneficiaries will receive a 3.2% COLA in January. This marks a significant decrease compared to the 8.7% COLA granted in 2023, which was a four-decade high, and the 5.9% increase in 2022. Despite this reduction, the 3.2% COLA remains higher than the average COLA in recent years. The COLA is determined based on the annual change in the third-quarter Consumer Price Index for workers.
Divergent COLA Paths: CSRS vs. FERS
Federal retirees under the Civil Service Retirement System will also see a 3.2% increase in their annuities. However, those who are part of the newer Federal Employees Retirement System (FERS), established in the 1980s alongside the Thrift Savings Plan, will receive a 2.2% COLA. This discrepancy arises from how FERS calculates its annual increases, which is linked to the COLA adjustments in both Social Security and CSRS.
For FERS retirees, the COLA adjustment depends on the annual change in CSRS COLA. If the CSRS adjustment is under 2%, FERS retirees receive the full COLA. If it falls between 2% and 3%, FERS enrollees get a 2% increase. However, if the CSRS COLA is 3% or more, FERS retirees receive a COLA equivalent to the Social Security and CSRS adjustment minus 1 percentage point.
The Push for Equal COLA in Federal Retirement Systems
This recurring situation of a 1 percentage point discrepancy between CSRS and FERS COLAs in 2024 has reignited calls from various employee organizations to pass the Equal COLA Act. This legislation, most recently introduced in February, aims to ensure that retirees under both systems receive an equal annuity increase each year.
William Shackleford, President of the National Active and Retired Federal Employees Association (NARFE), expressed concern over the disparity, stating, “While NARFE celebrates the COLA announcement, not all in the federal community will reap its full benefits. FERS COLAs are capped at 2% when consumer prices increase between 2% and 3%, and are reduced by 1 percentage point when consumer prices increase by 3% or more. This inequitable policy, enacted in the 1980s with the creation of FERS, fails to fully protect the earned value of FERS annuities.”
A Compromise from the 1980s Faces Scrutiny
The creation of FERS and the associated lower COLA in the 1980s was meant to compensate for the fact that CSRS enrollees do not have access to the 401(k)-style retirement savings plan. However, some argue that reduced annuity increases can have a tangible impact on retirees, particularly during periods of high inflation. The American Federation of Government Employees, the largest federal government labor union, highlighted the significance of this issue, explaining, “The difference for an average retiree is $18.37 a month, but over time, this could set FERS employees back thousands or even tens of thousands in retirement benefits, especially if we have a lot of high-inflation years. Already, someone who retired under FERS two years ago with an average benefit would have seen their pension fall $440 behind what their yearly benefit should be if it kept up with inflation.”
A fact sheet was provided that shows the effect of the various automatic adjustments.
