Cost-of-Living Adjustments for New Federal Retirees:

More Rational and Less Costly Processes Are Needed

FPCD-78-2: Published: Nov 17, 1977. Publicly Released: Nov 17, 1977.

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To protect the purchasing power of retirement income, the annuities of Federal employees under the various retirement systems are automatically adjusted each March 1 and September 1 for the increase in the consumer price index during the preceding 6-month period ending December 31 and June 30, respectively. Since, by law, cost-of-living adjustments are applicable to all annuities payable on the effective date of the increase, retiring Federal employees benefit from cost-of-living increases which occurred while they were still employed. They can receive a higher starting annuity which reflects the preceding annuity cost-of-living adjustment and, depending on the timing of their retirement, may be eligible for an additional adjustment immediately. Such increases escalate the already high costs of Federal retirement by inflating the basic annuity upon which succeeding adjustments are applied and can encourage valuable, experienced employees to retire.

The existing process overcompensates retiring employees by providing annuity increases based on changes in the consumer price index which occurred before their retirement. Eliminating the added enrichment of compensating retiring Federal employees and new Federal retirees for living cost increases which occur while they are still in an active status would still fully protect the purchasing power of retirement annuities. Federal annuity cost-of-living adjustment processes, which fully protect the purchasing power of retirement income as living costs rise, would still be more liberal than those of essentially all non-Federal pension systems. Few non-Federal plans have automatic adjustment provisions and those which do generally limit the amount of increase that can be granted in any 1 year. A more rational method of computing adjustments of new retirees would be to prorate their adjustments to reflect only the cost-of-living increases that occur after they retire. Proration of the annuity adjustments of new retirees would be much less costly than the existing process; over $800 million in annuity payments could be saved over the remaining lifespans of civil service employees retiring in 1978.

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