Other crucial data related with Social Security increased in January, in addition to the 5.9% COLA rise in benefits.
The 6.2 percent Social Security payroll tax will be applied to incomes up to $147,000, up from $142,800 previously.
Only the civil service retirement contribution is paid by FERS personnel (which is 0.8, 3.1 or 4.4 percent, depending on when they were hired).
CSRS Offset employees, on the other hand, continue to pay the same 7% overall (6.2 percent to Social Security and 0.8 percent to the federal retirement fund), but the money flows entirely to the federal retirement fund.
“This 5.9% COLA provides a buffer for seniors against current inflation after years of little or no adjustments,” said Ken Thomas, national president of the National Active and Retired Federal Employees Association. “However, the news isn’t so good for a large number of federal retirees: the January 2022 COLA for those who retired under the Federal Employees Retirement System will be 4.9 percent.”
FERS retirees receive the entire COLA if CSRS increases by less than 2% each year. FERS participants will only receive a 2 percent raise if the adjustment is between 2% and 3%.
Inflation increased by 5.4 percent for all urban consumers, according to the CPI. The Bureau of Labor Statistics keeps track of inflation.
In 2022, how much will civil service pensions rise?
We assess Civil Service pensions in payment every year to see if they should be enhanced to keep up with inflation. Pensions Increase is the title of this study (PI).
To calculate PI, we utilize the Consumer Price Index (CPI) from September of the preceding year. If the CPI shows a price increase, PI will be applied to pensions that are paid in line with the CPI. There will be no PI applied if prices have declined or stayed the same.
CPI was 3.1 percent in September 2021. As a result, beginning Monday, April 11, 2022, Civil Service pensions in payment will increase by 3.1 percent.
Are government pensions adjusted for inflation?
One of the best things about working for the government is your pension, and one of the best things about your pension is the cost of living adjustments (COLA) you get in retirement. COLAs, for those who are unfamiliar with the term, allow your pension to increase in line with inflation.
In 2022, will civil service retirees receive a COLA?
COLA for Federal Retirees in 2022 has been announced. The cost-of-living adjustment (COLA) for federal retirees in 2022 will be 5.9% for those on the Civil Service Retirement System (CSRS) and 4.9 percent for those on the Federal Employees Retirement System (FERS) (FERS).
Will my government pension be increased?
Following confirmation today that the rate of inflation in September, as measured by the Consumer Prices Index (CPI), was 3.1 percent, Civil Service Pensions will increase by 3.1 percent in April.
Key Facts
Civil service pensions were originally believed to be generous, but they are now about comparable to the better private sector pension plans. As a result, those few civil officials who earn substantial wages also receive generous pensions when they retire. However, the vast majority of civil officials are not well compensated, and their pensions are also not exceptionally attractive.
Pensions used to be computed by reference to final salary, which was a particularly advantageous feature for a minority of employees, usually the more senior employees.
As a result, those who had been promoted multiple times, especially late in their careers, benefited greatly from this regulation.
However, as of July 2007, the former final salary pension program was no longer accepting new members. New recruits began participating in a career average system on that date; see below for an explanation of what this entails. From 2012, the government will transition pre-July 2007 members to a new career average plan, but only for future accruals and for individuals who are more than 10 years past Normal Retirement Age.
Another generous feature was the annual increase based on the Retail Prices Index (RPI).
However, in June 2010, incoming Chancellor George Osborne announced that civil service pensions would now be increased in line with the Consumer Prices Index (CPI) rather than the Retail Price Index (RPI). This immediately reduced the value of all scheme benefits – including those already accrued from past contributions – by around 15%. (A comparison of historical RPI and CPI shows that if this criteria had applied in the past, a retiree’s pension would have been 15% lower in 2010 than it was in 1988.) For further detail on the variations between CPI and RPI, see notes 2 and 3.)
The fact that civil officials did not appear to contribute to the expense of their pensions was a third seemingly generous feature. However, this was not as beneficial as it appeared, because salaries were then fixed at lower levels, as if pension contributions had been deducted. Chancellor Osborne did, however, state in 2010 that he considered the cost of public sector pensions to taxpayers needed to be cut, and that the most effective method to save money in the medium term was to increase member contributions. The Chancellor indicated that the discount rate used to forecast future returns on current pension payments would be cut, resulting in greater contributions – mainly from employers. The Chancellor stated that he chose the predicted rate of growth for the economy, which he estimated to be 3%. If that was his reasoning, then 3% appeared a bit ambitious, therefore he cut it to 2.8 percent in the 2016 Budget, however the resulting increase in pension payments was this time taken only from employers.
On the other hand, the government declared in November 2013 that for at least the next 25 years, all public sector pensions would increase in line with inflation (as measured by the CPI). For private-sector pensions, this isn’t always the case.
Finally, like many other UK public sector pensions, civil service pensions are ‘pay as you go’ (or unfunded).
A pension (investment) fund does not exist.
Pensions are instead supported through contributions from current employers and employees, with the Treasury topping them as needed.
When compared to funded schemes, this system is sometimes criticized as being unduly advantageous.
However, given the magnitude of the plan, it is likely to make sense, not least because of the administrative and other costs associated with establishing and managing the fund.
- Benefits accumulated under prior systems will be safeguarded. Those who joined the civil service before July 2007 will have the portion of their pension that they have accrued up to April 2012 calculated using the salary they are on when they retire.
- Pension contributions have risen, partly as a result of the ‘burden sharing’ described below, but also as a result of further increases. Contributions for higher-paid workers have grown by up to 5% more than for lower-paid workers. The gain was 3.2 percent on average.
- For civil officials retiring in the next few years, the ‘normal pension age’ is now 67, and it will gradually rise to 68, along with similar changes to the age at which older individuals can begin receiving the state pension.
As a result …
Although certain ‘high-fliers’ who joined before career averaging was implemented in July 2007 fare much better than the majority, most public service pensions are not extravagant. The chart below summarizes all public sector pensions in payment in 2009-10 (extracted from Hutton’s interim report – see Note 3). For information on the inequalities in public sector pensions paid to men and women, see the notes at the bottom of this page.
(The average values represent total pensions divided by the number of retirees.) The median is the point at which half of all pensions can be located (and vice versa). Where there is a small number of well-paid employees – and thus high pensions – with a lengthy ‘tail’ of low-paid employees – and so reduced pensions – the mean is much higher than the median. There are around 300 public service pension schemes, although the six main categories of scheme have more than 95 percent of members: local government, NHS, teachers, civil service, military forces, and police.)
Background
As people live longer and birth rates fall, both public and private sector pension programs face major challenges throughout the industrialized world. In the United Kingdom, life expectancy at birth is rising at an incredible rate of one year every four years. Unless something changes, the proportion of UK seniors to employees is expected to rise from 27 percent in 2004 to 48 percent in 2050. As a result, companies and/or employees must now set away a considerably larger amount of their salary to cover pension payments, or employees must retire much later, or a mix of the two. Sharp drops in share prices around the turn of the century added to the burden on funded “final pay” schemes, drawing attention to the underfunded civil service pension scheme’s unique conditions.
The government’s dilemma is that many civil officials consider their pension to be a critical component of their entire salary package. Senior Civil Servants, in particular, are paid significantly less than their private-sector counterparts and do not have access to benefits like corporate cars or private health insurance. Their pension is quite important to them. As a result, the government was confronted with a high pension bill and a workforce that was adamant about not having their contracts rewritten. It did, however, impose the above-mentioned adjustments.
Historical Background
Employers introduced pensions, first in the armed services and subsequently in the civil service, to make it easier for older, less productive workers to retire and make room for younger, fitter men. Employers were incentivized to hire younger, fitter workers who would work for many years before drawing their pensions as a result of the presence of such plans.
Pensions originally appeared in the public sector in the late 1600s. Previously, serving naval, Customs, and other officers would sell their post for a lump payment or annuity. When a senior Port of London official became too ill to work, his successor was appointed on a salary of 80pa with the condition that 40pa be paid to his predecessor. So began the first 50 percent pension, funded by a younger employee’s wage.
Further significant developments occurred in the 1760s and 1770s, when contributions and pensions were extended to junior officers in the armed services and elsewhere, and again in 1847, when the Admiralty decided to face the fact that 200 senior captains would never sail again, promoted them to Rear Admiral, and put them on half pay as a form of retirement pension. Northcote and Trevelyan later advocated in the 1850s that “excellent service pensions” be extended to “the ordinary Civil branch of the public service” (Northcote Trevelyan Report – see in particular pp 21-22). Following Northcote & Trevelyan, a Royal Commission proposed that civil service retirement be made feasible at the age of 60 and mandatory at the age of 65. In the private sector, comparable strategies to attract and retain better employees were established by railway, gas, and other significant firms.
Chapter 12 of Pat Thane’s “Old Age in English History” contains a more extensive history of occupational pensions.
More information can be found in a National Audit Office report on public service pensions from 2021 (summary here) as well as on this website.
Notes
1.Male public-sector retirees often earn more than female retirees. According to Hutton, the median male public sector retiree earns just over 8,000 per year, while the median female public sector pensioner earns just under 4,000 per year. This disparity can be explained in part by a combination of more fragmented female careers (particularly those related to caring responsibilities), differential rates of part-time employment (currently, there are more than seven times as many female part-time public service workers as male part-time public service workers), and historical differences in career paths and, as a result, pensionable pay. Here’s where you may learn more about the issues that women government officials face.
2.This ONS Consultation Document shows why CPI is lower than RPI in most cases. This is not because one utilizes geometric averaging and the other uses arithmetical averaging, as has been widely stated. The real causes are much more complicated, and they involve the method clothes prices are recorded, as well as the fact that the RPI (unlike the CPI) includes housing costs but eliminates purchases made by poor and high income households more frequently.
This, from John Kay, shows why there is no single “right” inflation measure:
The stock market fluctuates in value. Assume that its level fluctuates between 50 and 100 each year, with no upward or decreasing trend. What is the market’s capital return? The answer should be 0, according to logic. Is that, however, common sense? You get a 100 percent return during the favorable years. In the worst-case scenario, the yield is minus 50%. As a result, the average return is 25%. There’s a reason for that. If you invested the same amount each year and sold at the end of the year, you would receive a very attractive annual return of 25% on average. What if you bought and sold on the spur of the moment? In that instance, four possibilities are equally likely: buy and sell at 50, buy and sell at 100, buy at 50 and sell at 100, buy at 100 and sell at 50, buy at 100 and sell at 50, purchase at 100 and sell at 50. The predicted annual increase is 12.5 percent.
You are not alone if you are completely perplexed at this point. The cost of capital and provision for future pension liabilities are both based on the average past return on the volatile equities market. However, the amount has been a point of contention for decades. It’s not so much about the underlying data as it is about how you calculate it. The decision between arithmetic and geometric means is sometimes phrased as a question. However, there is no correct or incorrect response. The suitable measure is tailored to the particular aim you have in mind in all cases of this nature.
Of course, the government continues to utilize RPI when it suits them, such as when hiking excise duties.
It’s unclear whether CPIH will eventually replace CPI. It has been the ONS’ preferred gauge of general inflation since early 2017.
3. The Hutton Report from 2011 gives a comprehensive overview of the challenges affecting public sector pensions.
4. Those seeking more in-depth information, including concerning their personal pensions, might check into one or more of the following options:
- Visit the official Civil Service pensions website or call 0300 123 6666 (+44 1903 835 902 from abroad) for further information.
- Become a member of the Public Service Retirement Fellowship, a registered charity dedicated to assisting retired civil workers, their partners, widows/widowers, and dependants in making the most of their retirement.
5. This is a complicated topic, and I’d appreciate it if you could correct me if I’ve misinterpreted or oversimplified anything. Please note, however, that I am unable to provide information regarding the civil service pension program or individual pension claims, nor can I assist in the tracing of pensions. Instead, you should refer to the resources provided in Note 4.
6.In the 1960s, the Royal Institute of Public Administration issued a paper on public sector pensions.
Does the NHS pension increase in line with inflation?
NHS pensions are subject to an annual increase depending on the consumer price index (CPI), which is set by the HM Treasury each year.
The increase will be credited to your pension at the start of the new tax year, in April.
In April and May, you’ll receive a ‘advice of payment,’ which will specify your new rate and percentage rise.
Our new commonly asked questions reference on pension increases and P60s is also available:
What is the 2022 OPM COLA?
Annuitants who retired under the CSRS will receive a 5.9% increase in 2022, while those who resigned via the FERS would receive a 4.9 percent increase.
Do pensions receive cost-of-living adjustments?
For years, the rate of inflation in the United States was low, which benefited American consumers by keeping their dollar’s purchasing power stable and robust. That is no longer the case.
Higher inflation is bad for everyone, but it is especially bad for those on fixed incomes, such as pensioners and retirees. If their pension incorporates a cost-of-living adjustment, or COLA, some retirees get a “rise” in their monthly checks during inflationary periods. Social Security claimants are among those who benefit from such hikes, with the Social Security Administration announcing in October that benefits would be increased by 5.9% in January to reflect the recent increase in consumer prices.
However, according to Alex Brown, research manager at the National Association of State Retirement Administrators, a nonprofit organization, millions of public pension recipients, including one-quarter of state and local government employees, do not participate in Social Security. Brown stated, “This figure includes nearly 40% of public-school teachers and over two-thirds of firefighters, police officers, and other first responders.”
In recent years, public pensions in at least 31 states have cut or eliminated cost-of-living increases as their payout obligations grew larger than the funds available to support them. Firefighters, teachers, police officers, and other employees in four other states Iowa, New Jersey, Washington, and Wyoming are now behind the eight ball.
In 2021, will CSRS retirees receive a COLA?
The percentage rise (if any) in the CPI-W from the average for the third quarter of the current year to the average for the third quarter of the previous year in which a COLA became effective is equal to the COLA effective for December of the current year. Any increment must be rounded to the nearest tenth of one percent. There is no COLA for the year if there is no rise or if the rounded increase is zero. For Social Security payments, military retirement pay, and CSRS (Civil Service Retirement System) retirement benefits, the most recent COLA is 5.9%. Beginning with the December 2021 benefits, which are payable in January 2022, payments will increase by 5.9%. Due to the FERS (Federal Employees Retirement System) “diet” and delayed COLA, those who are eligible for the 2021 COLA will receive 4.9 percent in their January FERS retirement benefit (remember, there is no COLA on the FERS supplement, and most FERS retirees do not receive a COLA until after they reach 62).”
The same depressing logic applies to folks who expect to retire in early January. They hope to receive the final check, or a portion of it, as well as some or all of their reimbursement for unused annual leave at the rate in effect in 2022. This is, once again, a non-starter. Those who retire on December 31, 2021 will receive their lump sum annual leave payment at the rate in effect in 2022, because the requirement is that the lump sum payment must equal the compensation the person would have earned had they continued employed until the end of the annual leave period.
We received a lot of questions from retirement-eligible workers regarding how to proceed since 2022 is a wage hike and COLA year. Could they earn one or both rewards if they retire at the right time? When the questions get that intricate, I turn to Tammy Flanagan, a benefits specialist. She’s a long-serving government benefits expert who recently retired. She currently runs her own consulting firm, where she has assisted a number of present and retired federal employees in getting the most out of their outstanding, but often difficult, benefit package. This query from an Interior Department employee is typical of the ones I’ve received this year. Tammy got it from me.
For many years, I’ve liked reading your Federal Report and have learnt a lot.