Cost-of-Living Adjustments for New Federal Retirees: More Rational and Less Costly Processes Are Needed

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.