Recent separate developments regarding cost-of-living adjustments apparently have led to some confusion about COLA policies.
One development was the TSP’s announcement regarding the inflation adjustment feature for annuities newly purchased starting March 2. For purchases that include the inflation protection feature—it is optional, as are several other features that can be added to the base annuity—the monthly payouts will increase by 2 percent each year regardless of actual inflation.
That’s in contrast to the traditional formula, in which the inflation adjustment option boosts the annuity by up to 3 percent, depending on an inflation index. In both cases, those increases are effective on the anniversary of the first annuity payment.
The TSP made the change on grounds that annuity purchasers were paying for more inflation protection than they were getting: the reduction in the annuity to pay for that protection has assumed an annual 3 percent increase but over the last 20 years, the actual increases have averaged just below 2 percent — and are projected to average 2 percent for years to come.
At nearly the same time, however, the White House budget request was released, repeating several proposed changes to COLA policies on civil service retirement benefits that are separate from the TSP annuity benefit.
Under the proposal, COLAs for those retired under CSRS would be reduced by a half percentage point below the inflation index used, while those retired under FERS would no longer receive COLAs on their federal annuities (they would continue to receive a full COLA on their Social Security benefits, however; Social Security is not part of CSRS but some CSRS employees are eligible for it through other earnings).
Those changes would require a change in law, however, and Congress has rejected them repeatedly in recent years.
The TSP annuity policy change is within its own discretion and is linked to the issuance of a new contract to its annuity provider, the Metropolitan Life Insurance Company. The purchase of an annuity is by far the least-used of the TSP account withdrawal options, and it is unclear how much the change in the inflation protection option will change that.
Reminder: COLAs, Pay Raises Different
Retirees get COLA adjustments, active employees get a raise