Are retired feds getting what they deserve?

Congress recently asked the General Accounting Office to determine whether federal retirees were receiving benefits that exceeded their pre-retirement pay. Apparently many taxpayers believe that federal retirees live too high on the hog. As will soon become apparent that just isn't so. To understand GAO's findings a bit of background information is useful. The Civil Service Retirement System (CSRS) and the Federal Employees Retirement System (FERS) are the two major retirement programs for federal civilian employees.

Although CSRS and FERS provide pensions the programs are designed quite differently. When the Social Security system was established Congress decided that employees enrolled in CSRS would not be covered by Social Security through their federal employment. CSRS is therefore a stand-alone pension program that provides an annuity determined by a formula. It also provides disability and survivor benefits. And like the Social Security program CSRS provides for annual cost-of-living adjustments (COLAs). The program was closed to new entrants after Dec. 31 1983.

FERS generally covers those employees who first entered federal service after 1983 as well as those who transferred from CSRS. The program began as a result of the Social Security Amendments of 1983 which required that all federal employees hired after December 1983 be covered by Social Security. FERS is a three-tiered program that includes Social Security a thrift savings plan and a basic pension. Like CSRS FERS provides disability and survivor benefits.

COLAs are a distinctive feature of CSRS and FERS pensions. The COLAs act as post-retirement increases in pension benefits to offset increases in living costs due to inflation. Congress enacted the first automatic COLA for CSRS annuitants in 1962. At that time the automatic adjustment was viewed as a way to control pension costs because previous adjustments had been criticized as being unrelated to price increases and subject to political manipulation.

All COLAs Not Created Equal

Because the COLA formula has changed many times retiring federal employees have not all received identical COLAs. The changes made during the 1960s and 1970s were intended to enhance pension purchasing power with respect to inflation as measured by the consumer price index (CPI). But some of the changes made during the '80s had the effect of reducing purchasing power.

Under the current policy enacted in 1984 COLAs for CSRS and FERS retirees are based on increases in living costs as measured by the CPI-W which is a cost-of-living index maintained by the Bureau of Labor Statistics. Although the COLA formula and schedule are the same for FERS and CSRS FERS COLAs are limited if inflation is more than 2 percent. If inflation is between 2 and 3 percent the FERS COLA is 2 percent. If inflation is 3 percent or more the COLA is the CPI minus 1 percent. But if inflation is less than 2 percent FERS COLAs are fully adjusted for inflation.

GAO found that about 459 000 (about 27 percent) of the 1.7 million retirees who were on the federal pension rolls as of Oct. 1 1995 were receiving pensions that had come to exceed their final salaries when these salaries were not adjusted for inflation. However when their salaries were adjusted for inflation no retiree was receiving a pension larger than his final salary.

GAO's analysis confirmed that three factors played an important role in explaining why the retirees' pensions came to exceed their unadjusted final salaries: the number and size of COLAs that retirees received the number of years they had been retired and the number of years of their federal service.

The first two factors together reflect retirement policies that are intended to maintain most or all of a pension's purchasing power. Although the COLAs received by the retirees in GAO's sampling caused their pensions to increase at rates that generally equaled inflation their unadjusted final salaries remained the same. Not surprisingly then the longer the annuitants had been retired the more COLAs they would have received and the more likely their pensions would have come to exceed their unadjusted final salaries.So what? If someone retired 30 years ago on a final salary of $200 a week wouldn't you expect his annuity to be greater than $200 a week now?

The third factor - the number of years of federal service - also contributed because years of service is a major component in determining the amount of a retiree's initial pension. Specifically the retirees from GAO's sample who spent more time with the government would have received starting pensions that came closer to the amounts of their final salaries than the retirees with fewer years of service.

GAO's analysis of the effects of COLA policies on retiree pensions suggests that these policies have played an important role in maintaining the purchasing power of retiree pensions since automatic COLAs began. It also suggests that these effects cannot be summarized easily because of the numerous changes that have been made in COLA policies during the past 35 years.

What GAO does not say (but I will) is that unionized employees would be out on strike if they had their COLAs tampered with as often as federal employees. Federal retirees' COLAs and federal employees' pay have become political footballs. As a result morale is poor notwithstanding any OPM surveys to the contrary. In the end taxpayers will get what they pay for. If they want a capable efficient civil service they must pay the prevailing rate.

-- Bureaucratus is a retired federal employee who contributes regularly to Federal Computer Week.


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