We also adjusted the retirees’ final salaries for inflation, using the 1995 CPI-W, and made a second estimate of the number of retirees whose 1995 pensions exceeded their final salaries, expressed in constant dollar terms. Some Retirees’ Pensions Exceeded Their Unadjusted Final Salaries

As of 1995, 1.7 million retirees who were covered by the CSRS and/or FERS pension plans were on the federal retirement rolls. However, when we adjusted the final salaries for inflation, no retiree received a pension that exceeded his or her final salary. As a general rule, using constant—rather than nominal—dollars is more meaningful for examining dollar values across time, because constant dollars correct for the effects of inflation or deflation. Three Factors Help Explain Why Pensions Can Come to Exceed Unadjusted Final Salaries

Three factors help to explain why some retirees’ pensions came to exceed their final salaries when their salaries were not adjusted for the effects of inflation—the number and size of COLAs that retirees received, the number of years that they had been retired, and their number of years of federal service. Appendix I provides a summary of COLA history since automatic COLAs were enacted in 1962. Some Retirees’ Pensions Would Have Been Smaller, Others Larger, Had Current Policy Been in Effect Without Interruption

Had current COLA policy—that is, the COLA policy enacted in 1984, which established the formula and schedule used today by OPM—been in effect without interruption since 1962, some sample retirees’ pensions would have been smaller than the pensions that they actually received, and other retirees’ pensions would have been larger. Our simulations suggest that other factors being equal, the majority of those who retired before 1970 would have received smaller pensions, while about 90 percent of those who retired after 1970 would have received larger ones. 1), primarily because of the difference in the number of the COLAs that were received and, to a lesser extent, the shorter period of compounding. The Percentage of Retirees Whose Pensions Exceeded Their Unadjusted Salaries Would Have Been Higher If Current Policy Had Been in Effect

The increases in the pensions of some sample retirees, if current policy had been in effect the entire time, would have been enough to cause an increase of 3.0 percentage points in the number of retirees whose pensions exceeded their unadjusted final salaries. Observations

Our analysis of the effects that COLA policies have had on retiree pensions shows that the policies have played an important role in maintaining the purchasing power of retiree pensions since automatic COLAs began. And, although current COLA policy would have tracked the CPI more closely had it been applied over the period we reviewed compared with some past COLA policies, the numerous changes that have been made in COLA policies over the past 35 years did not cause any retiree’s pension to exceed his or her final salary when the salaries were adjusted for inflation. Our analysis also shows that the effects that COLA policies actually have on retiree pension amounts cannot be summarized easily. As a consequence, COLA policy changes have affected individual retirees differently, depending on when they retired.
Why GAO Did This Study

Pursuant to a congressional request, GAO responded to a series of questions about federal pension costs and retirement policy, focusing on: (1) the number of federal retirees, if any, whose pensions have come to exceed the final salaries that they earned while working; (2) why these retirees' pensions came to exceed their final salaries; (3) the difference, if any, in these retirees' pension amounts if current cost-of-living-adjustment (COLA) policy that is, the COLA policy enacted in 1984, which established the formula and schedule used today by the office of Personnel Management (OPM), had been in effect without interruption since 1962; and (4) any difference in the number of retirees whose pensions would have exceeded their final salaries.

What GAO Found

GAO noted that: (1) an estimated 459,000 (or about 27 percent) of the 1.7 million retirees who were on the federal pension rolls as of October 1, 1995, were receiving pensions that had come to exceed their final salaries when these salaries were not adjusted for inflation; (2) however, when their salaries were adjusted for inflation --i.e., expressed in constant dollars, no retiree was receiving a pension that was larger than his or her final salary; (3) as a general rule, using constant dollars provides a more meaningful way to compare monetary values across time, because the use of constant dollars corrects for the effects of inflation or deflation; (4) although no retiree's pension exceeded his or her final salary in constant dollar terms, GAO's analysis confirmed that three factors played an important role in explaining why the retirees' pensions came to exceed their unadjusted final salaries: the number and size of COLAs that retirees received, the number of years that they had been retired, and the number of years of their federal service; (5) GAO's analysis of the effects that COLA policies have had on retiree pensions suggests that the policies have played an important role in maintaining the purchasing power of retiree pensions since automatic COLAs began; (6) it also suggests that the effects COLA policies actually have had on retiree pension amounts cannot be summarized easily because of numerous changes that have been made in COLA policies over the past 35 years; (7) COLA policy changes have affected individual retirees differently, depending on when their retirements began; (8) if current COLA policy, that is, the policy that was enacted in 1984, had been in effect without interruption since automatic COLAs began in 1962 the pensions of some of the sample retirees would have been smaller than the pension that they actually received, and the pensions of other retirees would have been larger; (9) GAO's comparison of the effects of current and historical COLA policy on pension amounts suggests that other factors being equal, a majority of those who retired before 1970 would have received smaller pensions had current COLA policy been continuously in effect during their retirement, and about 90 percent of those who retired after 1970 would have received larger pensions; and (10) the changes that would have occurred in the sample retirees' pension amounts under current policy were enough to cause about a 3 percentage point (3.0) increase in the number of retirees whose pensions would have come to exceed their unadjusted final salaries.