A “Starvation COLA” for FERS Annuitants?
President Trump’s budget proposal, submitted to Congress today, would reduce pay and retirement benefits for Federal employees and retirees. The two biggest reductions result from increasing employees’ FERS contributions and eliminating the Cost of Living Adjustment (COLA) for the FERS annuity (pension).
An explanation of the current COLA can be found here. Currently, FERS retirees are not fully compensated for inflation if the inflation rate is higher than 2%. This is sometimes referred to as the “Diet Cola.”
Current FERS Annuity COLA
Completely eliminating the COLA for FERS retirees should be called the “Starvation COLA.” Retirees' FERS annuities would never increase once payment began, significantly reducing lifetime annuity payments. The reduction increases for longer retirements and higher inflation rates.
The table below compares the difference in annual payments between the current FERS annuity with the Diet COLA and the proposed FERS annuity with no inflation adjustment.
For example, if inflation was continuously 2%, 3% or 4%, the annual annuity payment would be:
- 18% to 26% lower in 10th year of retirement,
- 33% to 45% lower in the 20th year of retirement and
- 45% to 59% lower in the 30th year of retirement.
Since the annuity payment would be fixed for the life of the retiree, the purchasing power of the FERS annuity will decrease every year. How much depends on the inflation rate and years in retirement.
The end result: gas, food, rent, travel, health care and other costs become less and less affordable.
FERS retirees also receive Social Security payments. Social Security payments have a full Cost of Living Adjustment. The percentage increase in annual Social Security payments is identical to the percentage increase in the inflation rate the previous year. However, few retirees expect Social Security to pay a majority of their expenses during retirement.
This makes the Thrift Savings Plan and other investments critical to the retirement security of FERS employees. Investments will have to fill a larger and larger decline in the purchasing power of the annuity.
Running out of investments is your biggest financial risk during retirement. Read more about that here.