Impact of Federal Employee COLA Reductions Would Be Dramatic
Proposed changes to federal pension benefits under the Trump Administration are poised to impact past, present, and future federal employees, if they are successfully implemented.
The budget proposal – which could reduce or eliminate the cost-of-living adjustment for current and future federal retirees – is being considered as a cost-saving measure that would have the side-effect of dramatically eating into federal pensions.
According to financial planner Arthur Stein, whose analysis was featured by Federal News Radio, “Over as little as 10 years, a 72-year old retiree would “lose” — as in not receive — up to 18 percent in COLA payments if inflation was 3 percent, and lose up to 26 percent if inflation during the period averaged 4 percent.” Charting Stein’s data makes the potential impact of the cuts readily apparent:
As outlined by federalretirement.net, monthly retirement benefits for federal employees are based on three primary factors:
- Average earnings upon which you have paid Social Security taxes, which are adjusted over the years for changes in average earnings of the American work force;
- Family composition (for example, whether you have a spouse or dependent child who may be eligible for benefits); and
- Consumer Price Index (CPI) changes that occur after you become entitled to benefits.
Changes to the COLA formulation would fundamentally alter that calculus by either minimizing the impact of, or eliminating entirely, the third factor outlined above.
While the cuts are far from a certainty, given the political battle in Congress that will likely ensue, the prospect is understandably alarming for federal employees whose future budgets rest on the decision.
Posted in General News