Congress has sent federal retirees' pensions on a roller coaster ride for three decades, leaving former civil servants with widely varying retirement incomes.
According to a new study by the General Accounting Office, Congress established automatic cost-of-living adjustments (COLAs) for federal pensions in 1962. Previously, COLAs were issued ad hoc, leaving them open to "political manipulation." But since 1962, Congress has changed the COLA formula nine times to cut costs and reduce the federal deficit.
"The effects of many individual COLAs and COLA policy changes are cumulative and compound over time," GAO said. "As a consequence, COLA policy changes have affected individual retirees differently, depending on when they retired."
While changes during the 1960s and 1970s boosted COLAs, adjustments during the 1980s tended to reduce pension increases.
Civil Servants' Pensions--A COLA Time Line:
- 1962. Congress enacts the first automatic adjustments for federal retirees' pensions. The COLAs are based on the Consumer Price Index.
- 1969. Adds 1 percent to the COLA.
- 1976. Replaces the 1 percent "kicker" with semiannual COLAs.
- 1981. Replaces semiannual COLAs with annual COLAs, payable in March.
- 1982. Restricts pensions so they do not exceed the current maximum pay for GS-15 employees.
- 1983. Establishes current COLA formula and makes COLAs payable in January of each year.
- 1984. Specifies that COLA checks will be issued the first business day of the month after they are scheduled.
- 1985. Suspends COLAs for fiscal 1986 and following years if deficit reduction targets are not met.
- 1986. Reinstates COLAs for 1987 to 1991.
- 1993. Delays COLAs until March for fiscal 1994, 1995 and 1996.
- 1996. The Clinton administration's original budget proposal calls for a return to the COLA delays, starting in fiscal 1998. The delays are blocked and excluded from the final budget agreement signed in August 1997.
GAO reviewed COLA policies to determine if any federal retirees' pensions are larger than their final salaries as government employees. Roughly 460,000, or 27 percent, of the 1.7 million federal retirees on the government's rolls receive pensions that are larger than their final salaries. But when adjusted for inflation, none of their pensions exceeded their final salaries.
For example, if a person retired in 1961 with an annual salary of $7,290, his 1995 pension would have been $21,102--nearly three times his final salary. But when his final salary is adjusted for inflation, it would be $36,291 in 1995 dollars, meaning his 1995 pension was only 58 percent of his final salary.
Meanwhile, someone who retired in 1981 with a final salary of $21,594 would have received a pension in 1995 of $24,064. The final salary expressed in 1995 dollars would be $35,372, meaning her 1995 pension would have been 68 percent of her final salary.
Despite the ups and downs of COLA policy, federal retirees' pensions have generally kept pace with inflation, GAO said.
"[COLA] policies have played an important role in maintaining the purchasing power of retiree pensions since automatic COLAs began," GAO said.
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