Pay Raises and COLAs

Last week we looked back on 25 years of laws that have changed the way federal retirement benefits are administered. This week, with a potential third year of a federal pay freeze looming, let’s take a look at salaries and how they compare with cost-of-living adjustments for federal retirees.

In addition to weighing legislation directly affecting retirement and insurance benefits, each year Congress also considers annual pay adjustments for current employees. COLAs for retirees are governed by a formula set in law. They are determined in reference to the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W), as calculated by the Bureau of Labor Statistics.

As of the end of June, the CPI-W had increased 1.6 percent in the previous 12 months. The 2013 COLA for retirees will be determined based on the results posted at the end of September 2012. That means price increases and decreases during July, August and September will affect the COLA that retirees receive in their Civil Service Retirement System and Federal Employees Retirement System benefit checks payable on Jan. 1, 2013. The announcement of the 2012 COLA for retirees is made in mid-October.

To constrain retirement costs, Congress has placed restrictions on COLAs to FERS retirees. FERS provides COLAs to retirees younger than age 62 only if they are subject to special provisions (covering, for example, law enforcement officers and firefighters), are disabled or are survivor annuitants. FERS retirees 62 and older receive a full COLA only if the CPI increases by 2 percent or less. FERS retirees receive a 2 percent COLA if the CPI increase is between 2 percent and 3 percent. If the CPI increases by 3 percent or more, then the FERS COLA is 1 percentage point less than the change in the CPI.

Increases in pay for federal, on the other hand, are based on different economic (and political) variables. Pay raises for civilian federal workers are nominally indexed to wage and salary increases in the private sector, as measured by the Employment Cost Index. But as a practical matter, civilian pay tends to be based on legislative agreements worked out in Congress.

So how have raises and retiree COLAs compared over the years? In the chart below, you can see the annual employee pay adjustment every year since 1970 compared to the annual retiree cost-of-living adjustment. As you can see, the two can differ greatly. Sometimes, like this year, retirees come out ahead. At other times, the across-the-board employee pay raise is higher.  

Year	Pay Raise	Retiree COLA (CSRS)	Retiree COLA (FERS)	Year	Pay Raise	Retiree COLA (CSRS)	Retiree COLA (FERS)
1970	6%	5.6%		1971	6%	4.5%
1972	10.9%	4.8%		1973	4.8%	6.1%
1974	5.5%	12.2%		1975	5%	12.8%
1976	4.8%	5.4%		1977	7%	9.3%
1978	5.5%	7.4%		1979	7%	11.1%
1980	9.1%	14.2%		1981	4.8%	4.4%
1982	4%	8.7%		1983	0%	3.9%
1984	4%	0%		1985	3.5%	3.5%
1986	0%	0%		1987	3%	1.3%
1988	2%	4.2%	3.2%	1989	4.1%	4%	3%
1990	3.6%	4.7%	3.7%	1991	4.1%	5.4%	4.4%
1992	4.2%	3.7%	2.7%	1993	3.7%	3%	2%
1994	4%	2.6%	2%	1995	2.6%	2.8%	2%
1996	2.4%	2.6%	2%	1997	3%	2.9%	2%
1998	2.9%	2.1%	2%	1999	3.6%	1.3%	1.3%
2000	4.8%	2.4%	2%	2001	3.7%	3.5%	2.5%
2002	4.6%	2.6%	2%	2003	4.1%	1.4%	1.4%
2004	4.1%	2.1%	2%	2005	3.5%	2.7%	2%
2006	3.1%	4.1%	3.1%	2007	2.2%	3.3%	2.3%
2008	3.5%	2.3%	2%	2009	3.9%	5.8%	4.8%
2010	2%	0%	0%	2011	0%	0%	0%
2012	0%	3.6%	2.6%

 

 
Source: Congressional Research Service.