Federal staff and retirees should brace themselves for a reduced increase in benefits by 2025 because of an old rule responsible for the cut in the Cost of Living Adjustment (COLA) for fed workers. The positive income adjustment will be 2.5% for those who receive Social Security benefits and for the majority of retired employees under the Civil Service Retirement System (CSRS), but it will be reduced to 2% for those on the Federal Employees Retirement System (FERS). This persistent problem is making a lot of federal retirees feel cheated.
What is COLA and how does it affect your benefits?
The Cost of Living Adjustment (COLA) is an annual increase designed to help benefits keep pace with inflation. It is calculated based on the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W), which tracks changes in the cost of goods and services that people need for everyday living. COLA is important because it helps protect the purchasing power of retirees, ensuring that their pensions or benefits keep up with rising prices over time.
However, not all federal retirees are treated equally when it comes to COLA. Those under the FERS system often receive a lower increase than their CSRS counterparts, especially when inflation is above 2%. This discrepancy can make it harder for FERS retirees to maintain their standard of living, especially as costs continue to rise year after year.
Why are FERS retirees getting less?
Under the current law, FERS retirees receive a lower COLA when inflation exceeds certain thresholds. Specifically:
- If inflation is 2% or less, both FERS and CSRS retirees receive the same COLA.
- If inflation falls between 2.01% and 3%, FERS retirees only get a 2% COLA.
- If inflation exceeds 3%, FERS retirees receive 1% less than CSRS retirees.
In 2025, inflation is expected to be around 2.5%, which means FERS retirees will only get a 2% increase. This may not sound like a big difference, but the cumulative impact of receiving lower increases year after year can add up. According to experts, FERS retirees who left the workforce four years ago may have lost over $1,000 in potential benefits due to these lower COLAs.
Why is this rule considered unfair?
Many people see the lower COLA for FERS retirees as unfair because it penalizes them for being part of a different system. The issue is that both FERS and CSRS retirees face the same rising costs of living, but FERS retirees are being short-changed by a formula that reduces their benefits in years of higher inflation.
For instance, Julie Tippens, the Legislative Director for the American Federation of Government Employees (AFGE), explains, “Our nation’s public servants should not see their hard-earned retirement benefits eroded by a COLA set at the start to be arbitrarily lower than the real inflation rate.” In other words, it is not that inflation is affecting FERS retirees less – it is that the system is designed to give them a smaller increase.
What can be done to fix this?
Numerous initiatives are currently being implemented in order to counter this imbalance. The Equal COLA Act, which is sponsored by Senator Alex Padilla and Representative Gerry Connolly, seeks to put an end to the unjust policy of diminution in the cost of living adjustment (COLA) for FERS retirees. This bill will provide for all federal retirees, regardless of whether they are FERS or CSRS, their cost of living adjustment will be provided.
Supporters agree that this alteration is necessary to safeguard the financial stability of individuals serving in a governmental capacity, who have devoted themselves to the federal government throughout their professional careers. In the absence of such a measure, FERS retirees will continue to experience a decrease in the ‘real’ value of their pensions due to a rise in inflation.
How will this affect your retirement?
In the case of retirees who have opted for FERS, this decreased COLA might result in losing hundreds or even thousands of dollars during their retirement phase. If inflation does not decrease, the effect will worsen over the years making it even harder to meet expenses like health care, medicines, accommodation, and even living expenses such as food.
For example, if you are a member of the FERS annuity retirement scheme, you need to understand how these rules affect your benefits and possible legislation changes like the Equal COLA Act. Until then, FERS retirees will have to contend with slight increases in their pension benefits that will not be adequate to beat inflation.
