Highly anticipated news came out of the Social Security Administration on Thursday, when the agency announced an 8.7% cost-of-living increase in federal retirement benefits starting in December. This is the largest increase in 42 years.
That means the average beneficiary will see an increase of about $140 in their monthly payouts beginning in January, according to federal officials.
However, financial planning experts and employee advocacy groups warned against taking that number at face value. For one, not all COLAs are applied equally, as Federal Times reported.
If past years’ trends reflect the present, generally, most retirees currently collecting benefits will get the 8.7% COLA adjustment because they’re enrolled in the older Civil Service Retirement System, or CSRS.
A likely smaller population, however, will receive only a 7.7% boost, by nature of being enrolled in the newer Federal Employees Retirement System, or FERS.
In 2018, the latest year for which complete data is available, more than 2.6 million people received civil service annuity payments and of those, more than two-thirds received annuities earned under CSRS. If that data stands, then most folks currently receiving COLAs will get the higher of the two for 2023.
FERS COLAs are capped at 2 percent when consumer prices increase between 2% and 3%, and are reduced by 1% 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, which decrease in value year after year—exactly what COLAs are intended to prevent,” said Ken Thomas, national president of the National Active and Retired Federal Employees Association.
However, if you’re still working and are looking to retire in the future, you’ll generally fall into FERS as CSRS ages out. Less than 5% of the current federal working population is under the older system.
Under FERS, COLAs are applied only to annuities of retirees aged 62 or older, individuals who retired by reason of disability, and to survivor annuitants.
Especially during periods of high inflation, seniors must be aware of how these adjustments play into their entire retirement plan.
A common misconception is that COLAs are intended to to completely counteract rising costs, but instead they just help federal retirement dollars keep pace with inflation. Notably, this is a benefit for retired workers, not a raise for employees.
Meanwhile, federal health care premiums for next year will increase sharply, a point that employee advocacy groups have said diminishes the impact of COLAs, especially since seniors spend more on health care than any other segment of the population.
Estimates from the Federal Reserve Bank of Dallas last month indicate the rate of health care inflation could double by mid-2023.
Current employees thinking about expediting their retirement based on this year’s whopper of a COLA should be extra careful, said Chris Kowalik, a federal retirement expert for FedImpact.com and the founder of ProFeds, a contractor providing retirement training to federal employees nationwide.
“Not so fast,” she said in a phone interview. “If someone were to retire in October [of this year], they would only get one-twelfth of the COLA in January .”
October retirees would only start getting the full COLA in 2024, for example, whatever that new COLA would be.
At one point, there was only one federal retirement system administered by the government, and that was CSRS. It was replaced by FERS for employees who entered covered service beginning in 1987.
When the new system was rolled out, employees could voluntarily switch from CSRS during open seasons in 1987 and 1998.
CSRS employees contribute between 7-8% of their paycheck to the system, and then when they retire they receive a relatively large annuity compared to their FERS counterparts.
This annuity is intended to fully fund the employees retirement and includes cost of living adjustments with no restrictions on age, according to United Benefits.
FERS employees have three components to fund their retirement: pension, the Thrift Savings Plan and Social Security.
Some measures have been put forth to close the gaps, but there has been little movement. One is to pass legislation that would require the Bureau of Labor Statistics to calculate COLAs based on the consumer price index for the elderly instead of the consumer price index for workers.
The Equal COLA Act, introduced by Rep. Gerry Connolly (D-Va.) in 2021, would also bring COLA parity for the more than one million FERS retirees and survivors.
In addition, an abrupt turn to deflation could mean that there may be no COLA payable in 2024.