The FERS Cost-of-Living-Adjustment (COLA) and the Equal COLA Act (H.R. 866)

The FERS Cost-of-Living-Adjustment (COLA) and the Equal COLA Act (H.R. 866)

March 21, 2023
The FERS Cost-of-Living-Adjustment (COLA) and the Equal
COLA Act (H.R. 866)
The Equal COLA Act, H.R. 866, was introduced on
For more information on CSRS and FERS, see CRS Report
February 8, 2023. This bill, which has also been introduced
R47084, Federal Retirement Plans: Frequently Asked
in prior Congresses, would make changes to the cost-of-
Questions.
living-adjustment (COLA) under the Federal Employees’
Retirement System (FERS). Specifically, the Equal COLA
FERS COLA: Current Law
Act would remove the cap for the FERS COLA under
COLAs protect the purchasing power of retirement benefits
current law, which reduces the COLA when the change in
from being eroded by inflation in the prices of goods and
the measure of inflation is above 2%. Thus, under the Equal
services. FERS, like Social Security and CSRS, includes an
COLA Act, the FERS COLA calculation would be the same
automatic COLA, which is based on the rate of inflation as
as the COLA for Social Security benefits and retirement
measured by the Consumer Price Index for Urban Wage
benefits under the older Civil Service Retirement System
Earners and Clerical Workers (CPI-W). COLAs for Social
(CSRS). The Equal COLA Act would not make any
Security, CSRS, and FERS are all determined using the
changes to the age at which nondisabled FERS retirees
change in the average monthly CPI-W during the third
begin to receive COLAs, which is generally age 62 under
quarter (July to September) of the current calendar year and
current law.
the third quarter of the base year, which is the last previous
year in which a COLA was applied. The “effective date”
Background on FERS
for these COLAs is December, but they first appear in the
FERS covers most civilian federal employees first hired in
benefits issued during the following January.
1984 or later. The Federal Employees’ Retirement System
Act of 1986 (FERS Act; P.L. 99-335; June 6, 1986) created
COLAs under FERS, unlike Social Security COLAs or
FERS as a three-part retirement package. FERS includes (1)
CSRS COLAs, are limited if the change in inflation is
Social Security; (2) the FERS basic annuity, a defined
greater than 2.0%. If the rate of inflation during the
benefit (DB) plan that provides a monthly payment in
measurement period is between 2.0% and 3.0%, the COLA
retirement; and (3) the Thrift Savings Plan (TSP), a defined
under FERS is 2.0%. If inflation is greater than 3.0%, then
contribution (DC) plan similar to the 401(k) plans provided
the COLA for FERS benefits is equal to the change in the
by many private sector employers, to which the government
CPI-W minus one percentage point. Thus, the FERS COLA
and most employees contribute.
is sometimes referred to as being subject to a cap or as a
diet COLA. For example, from the third quarter of 2021 (the
The Social Security Amendments of 1983 (P.L. 98-21;
current base year) to the third quarter of 2022, the CPI-W
April 20, 1983) served as the primary impetus for the
increased by 8.7%. Therefore, paid out beginning January
creation of FERS. Under P.L. 98-21, all federal employees
2023, the CSRS COLA is 8.7% and the FERS COLA is
hired after December 1983 were covered by Social Security
7.7%.
and required to make Social Security contributions. The
older CSRS system was first created in 1920 under the Civil
Additionally, nondisabled retirees under the age of 62 do
Service Retirement Act of 1920 (P.L. 66-215; May 22,
not receive FERS COLAs unless they are subject to the
1920). CSRS covers most civilian federal employees hired
special provisions for law enforcement officers (LEOs) and
before 1984 and generally does not include Social Security
related personnel (i.e., subject to a mandatory retirement
coverage. Instead, CSRS provides a standalone DB annuity
age). Survivors and disabled retirees are eligible for COLAs
payment. Congress determined that adding Social Security
under FERS regardless of age. CSRS COLAs do not have
coverage on top of CSRS would be duplicative in terms of
an age requirement.
retirement benefits and contributions. Thus, Congress
decided to create a new retirement plan for federal
Authority for the FERS COLA is set out under Title 5,
employees that was fully integrated with Social Security.
Section 8462, of the U.S. Code. For more information,
This effort led to FERS.
including historical CSRS and FERS COLAs, see CRS
Report 94-834, Cost-of-Living Adjustments for Federal
There were two additional policy goals addressed in the
Civil Service Annuities.
creation of FERS: (1) reducing the costs of federal
retirement borne by the federal government and (2) fully
For more information on Social Security COLAs, see CRS
funding those costs through required contributions. (Unlike
Report 94-803, Social Security: Cost-of-Living
FERS, CSRS was not designed to be fully funded and
Adjustments.
accrued a large unfunded liability as additional benefits
were promised over time.)
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The FERS Cost-of-Living-Adjustment (COLA) and the Equal COLA Act (H.R. 866)
Legislative Rationale for the FERS COLA
would have been effective 90 days after enactment rather
The FERS COLA—both the capped COLA calculation and
than upon enactment, as under the House versions.)
the age 62 requirement for nondisabled retirees—was
The Equal COLA Act would change the formula used to
viewed by some as a legislative compromise aimed at cost
calculate the FERS COLA. In particular, it would remove
concerns in the creation of FERS under P.L. 99-335. The
the cap for the FERS COLA under current law that reduces
less generous COLA under FERS was considered as part of
the COLA when the change in the measure of inflation is
the bigger retirement package, which included Social
greater than 2%. Thus, under the Equal COLA Act, the
Security and TSP.
FERS COLA calculation would be the same as the COLA
for Social Security benefits and CSRS benefits. The Equal
For example, in the congressional consideration of the
COLA Act would not make any other changes. It would not
FERS COLA, which was eventually enacted under the
change the age at which nondisabled FERS retirees
FERS Act, Representative Michael Barnes of Maryland
generally begin to receive COLAs, which is age 62 under
argued:
current law. The changes under H.R. 866 and earlier House
versions of the Equal COLA Act would apply to FERS
Finally, there may be some alarm that this
COLAs made after enactment for all FERS retirement
agreement does not provide full COLA, and in fact
benefits.
provides only COLA minus 1 for retirees after age
62. Anyone who reads those provisions as
At this time, no version of the Equal COLA Act has been
capitulation on the commitment we’ve maintained
reported out of committee or scored by the Congressional
to Federal retirees to protect their benefits from
Budget Office. In general, to the extent that the CPI-W
inflation would be gravely mistaken.
change for a given year is greater than the current FERS
COLA cap (i.e., greater than 2%), the bill would increase
This is not an invitation to erode future COLAs. In
federal expenditures out of the Civil Service Retirement and
the context of the overall retirement plan, an
Disability Fund (CSRDF), the federal trust fund that
indexed Social Security Program, coupled with
finances CSRS and FERS benefits. This bill would also
interest earning, tax-sheltered savings, can provide
trigger an increase in agency contributions to FERS, which
annuity growth more than capable to keeping place
are intragovernmental transfers to the CSRDF, to the extent
with rising costs. But again, the risk and the burden
that the dynamic normal cost for FERS increases under this
of achieving the requisite level of savings falls to
proposal. (The dynamic normal cost is the amount,
the employee (Congressional Record, vol. 132
expressed as a percentage of payroll that must be set aside
[May 22, 1986], p. H3227).
each year to fully fund pension benefits for workers who
continue to accrue new benefits, including the effects of
Similarly, in the deliberation leading up to the FERS Act,
employee pay raises, COLAs, and changes in the rate of
Senator Thomas Eagleton of Missouri stated:
interest.)
The results of those final efforts are before us today.
Arguments in favor of the Equal COLA Act portray the bill
The Federal unions, who exhibited statesmanship
as addressing the perceived unfairness of differences in
throughout the entire process, receded on some
COLAs across federal retirement systems (i.e., a lower
highly important points, such as a cost equivalent to
COLA for FERS in comparison with CSRS), particularly in
the civil service retirement system and a guaranteed
times of rapidly increasing inflation. Whether the current
COLA provides adequate inflation protection for FERS
full COLA for retirees. The unions fully support
today’
retirees may present a question for policymakers. Yet the
s conference report. The administration,
deliberation surrounding the creation of FERS indicates that
which had hoped for a lower over-all cost than the
some policymakers suggested the capped FERS COLA
bill achieved, an increase in the Federal retirement
would be sufficient for retirees in conjunction with Social
age, and an accrual formula based on high-5 salary,
Security and TSP benefits.
rather than high-3, also swallowed hard and it, too,
fully supports the report. The House and Senate
Arguments against the bill include concerns with the
conferees fully support the bill, and my reading
additional costs of the proposal, which would apply to all
from staffers and colleagues is they can’t wait to
FERS retirees and their survivors. As reported in the
join the new system (Congressional Record, vol.
FY2021 Civil Service Retirement and Disability Annual
132 [May 20, 1986], p. S6200).
Report (most recently available), there are approximately
1.1 million FERS annuitants, including 985,000 retirees and
The Equal COLA Act (H.R. 866)
87,000 survivors receiving FERS benefits.
In the 118th Congress, Representative Gerry Connolly
For additional information on the funding of FERS, see
introduced the Equal COLA Act as H.R. 866. The Equal
Office of Personnel Management, FY2021 Civil Service
COLA Act has been introduced in prior Congresses by
Retirement and Disability Annual Report,
Representative Connolly as H.R. 304 in the 117th Congress,
https://www.opm.gov/about-us/budget-performance/other-
H.R. 1254 in the 116th Congress, and H.R. 7165 in the 115th
reports/fy-2021-csrdf-annual-report.pdf.
Congress. In the 117th Congress, Senator Alex Padilla also
introduced the Equal COLA Act as S. 4221. (All House-
Katelin P. Isaacs, Specialist in Income Security
introduced versions of the bill are identical. The one
IF12354
Senate-introduced version is substantively similar but
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The FERS Cost-of-Living-Adjustment (COLA) and the Equal COLA Act (H.R. 866)

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