Federal retirees see modest 1.7 percent bump in cost of living

October 16, 2012

Federal retirees will receive an inflation adjustment of 1.7 percent in January, translating to about a $50 increase in the average monthly payment under the annuity program for most of them.

The increase, based on an inflation measure announced Tuesday, mirrors the cost-of-living adjustment (COLA) to be paid to Social Security beneficiaries.

The modest increase drew a mixed reaction from groups representing the federal workforce.

“While next year’s COLA is much smaller than the increase federal retirees and Social Security recipients received at the beginning of this year, it could have been much worse, ” said J. David Cox, president of the American Federation of Government Employees. “Under the deficit-reduction plan proposed by Morgan Stanley director Erskine Bowles and ex-senator Alan Simpson, the annual COLA would be cut by three-tenths of a percentage point.”

That adds up, Cox said in a statement that went on to criticize the earlier proposed cut.

Colleen M. Kelley, president of the National Treasury Employees Union, said the increase is “a vivid reminder of the pressures retired Americans, including retired federal employees . . . continue to face in making ends meet. That is particularly so since a large portion of retiree spending is directed toward health-related needs, a field in which inflation generally far outstrips that of other expenses.”

There are two main federal retirement systems: the Civil Service Retirement System, which generally covers those hired before 1984, and the Federal Employees Retirement System, mainly for those hired in that year and after. While four-fifths of active federal employees are in the FERS program, about the same share of retirees draw benefits from the older CSRS program — 1.5 million out of 1.9 million.

The CSRS program is a stand-alone benefit that does not include Social Security coverage; the yearly benefit is about 2 percent of the average of the employee’s highest three consecutive annual salaries, for each year of service.

The FERS program provides Social Security on the same terms as for other American workers, plus a lesser civil service annuity than the CSRS provides.

There are numerous other differences between the two, including that most FERS retirees are ineligible for the COLAs until age 62. Under both, the COLAs are prorated for those who have been receiving benefits less than a full year.

As of Oct. 1, 2011, the average monthly civil service annuity for a CSRS retiree was $3,002, and the average for a FERS retiree was $1,097. The median monthly benefit amounts — where half are above and half are below — were $2,620 for CSRS and $823 for FERS.

The figures probably are slightly higher today because of COLAs paid at the start of this year, 2.6 percent under the FERS and 3.6 percent under the CSRS. No COLAs were paid in 2010 or 2011 because of an earlier period of deflation.

A COLA also applies to survivor beneficiaries, whose payments on average are somewhat less than half of what the retiree received while living. There are about 546,000 CSRS survivor beneficiaries and about 40,000 under the FERS.

The COLA will bring the average Social Security benefit to $1,237 a month, according to the Social Security Administration.

For retirees, one main value of a COLA is to offset increasing health insurance costs. The Office of Personnel Management recently announced that the enrollee share of Federal Employees Health Benefits Program premiums will rise by 3.7 percent on average in 2013.

Premiums for the most popular plan for retirees, the Blue Cross-Blue Shield standard option, are rising by less than 1 percent — by 33 cents biweekly for self-only coverage and by $1.66 for family coverage. Federal retirees pay FEHBP premiums at the same rate as active employees, though retirees pay them monthly rather than biweekly.

National Active and Retired Federal Employees Association President Joseph A. Beaudoin said the COLA will provide “some relief from the rising costs of everyday goods. NARFE continues to support strong COLAs based on fair assessments of increases in consumer prices, including medical costs, to keep federal annuities in line with inflation.”

For FERS-covered employees, the portion of their salaries subject to the Social Security payroll tax will rise from $110,100 to $113,700 in 2013. That tax traditionally is 6.2 percent, although it has been 4.2 percent in 2011 and 2012. The percentage for 2013 is to be decided during a post-election session of Congress.

CSRS employees do not pay Social Security taxes but instead pay into a separate civil service pension fund. Some of them, however, are in a hybrid system in which they earn a Social Security benefit, but the amount is offset against their civil service annuities.

All federal employees additionally pay 1.45 percent of all salary into Medicare.

The COLA adjustment affects only benefits for retirees, not pay for active employees. Federal pay rates will not increase in January for the third straight year, although individuals still can receive raises for promotion or performance, or on successfully completing the waiting periods used in some federal pay systems.

A general federal raise could be paid in April after a temporary government funding bill expires. President Obama has proposed a 0.5 percent increase, but whether to pay that increase or extend the freeze for the full year will be decided at that time.

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