The COLA will be one percentage point lower for federal employees in the newer retirement system.

The COLA will be one percentage point lower for federal employees in the newer retirement system. Catherine McQueen / Getty Images

Federal Retirees Are Set to Receive the Highest COLA in Decades, But Some Will Get Less Than Others

Civil Service Retirement System enrollees will see an 8.7% increase in their defined benefit pension payments in 2023, while participants in the Federal Employees Retirement System will only receive a 7.7% increase.

For the second year in a row, federal retirees will see the largest annual increase in benefits payments in decades, as the Social Security Administration announced Thursday that the annual Social Security cost-of-living adjustment for 2023 will be 8.7%. Not all federal retirees will get the full 8.7%, however, prompting renewed calls for parity between the federal government’s retirement systems.

Social Security cost-of-living increases are calculated based on the annual change in the third quarter consumer price index for workers. The Civil Service Retirement System also calculates enrollees’ annual annuity increases on that basis, meaning retirees enrolled in CSRS will see an 8.7% increase to their annuity payments in 2023, the largest COLA since 1981.

Last year, Social Security and CSRS annuitants received a 5.9% cost of living adjustment, which marked the largest increase since 1982.

But former federal workers who are enrolled in the newer Federal Employees Retirement System, which came into being along with the 401(k)-style Thrift Savings Plan, will only receive a 7.7% increase in their annuities.

That’s because FERS operates on an extrapolation of the Social Security and CSRS cost-of-living adjustment. Each year, if CSRS sees an increase of under 2%, FERS retirees receive the full COLA. If the adjustment is between 2% and 3%, FERS enrollees only receive a 2% increase. And if the CSRS COLA is 3% or more, FERS retirees receive the Social Security and CSRS COLA, minus 1 percentage point.

The formula reducing the annual increase in defined benefit payments for FERS participants has been a pain point for organizations representing federal workers and retirees. Earlier this year, Sen. Alex Padilla, D-Calif., introduced legislation that would standardize the annual cost-of-living adjustments that federal retirees receive across both retirement systems.

“While CSRS annuities and Social Security benefits will be going up 8.7%, the January 2023 COLA unfortunately will be 7.7% for those who retired under the Federal Employees Retirement System,” said Ken Thomas, national president of the National Active and Retired Federal Employees Association. “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.”

Thomas also renewed his organization’s call for the government to shift the economic metric used to calculate the annual increase in retirement annuities to one that more closely aligns with the spending of retirees: the consumer price index for the elderly. During the 2020 presidential campaign, President Biden endorsed this idea, although thus far, it has not come to fruition.

“Seniors spend more on health care than any other segment of the population, and those who enroll in Federal Employees Health Benefits plans for 2023 will see an average increase of 8.7% in their share of premiums, the biggest jump since 2011,” Thomas said. “For years, NARFE has urged Congress to address the inequity of COLAs that don’t keep up with rising health care costs by passing legislation requiring the [Bureau of Labor Standards] to calculate COLAs based on the consumer price index for the elderly (CPI-E) instead of the consumer price index for workers (CPI-W).”