United States General Accounting Office

GAO Report to the Chairman, Committee on

Appropriations, U.S. Senate

August 1997 FEDERAL PENSIONS

Relationship Between

Retiree Pensions and

Final Salaries

GAO/GGD-97-156

GAO United States

General Accounting Office

Washington, D.C. 20548

General Government Division

B-270600 

August 11, 1997

The Honorable Ted Stevens

Chairman, Committee on Appropriations

United States Senate

Dear Mr. Chairman:

Federal spending on pensions for retired civilian employees of the federal

government represents a significant share of the budget. In fiscal year

1996, excluding interest on the public debt, civilian employee pension

benefits (i.e., civil service retirement and disability) was the seventh

largest mandatory spending program, with nearly $40 billion in payments

to 2.3 million retirees and survivor annuitants. Although current

employees finance a portion of these benefits through the contributions

they make, the federal government pays most pension costs, as do states

and localities and private sector employers. Thus, it is important for

policymakers to understand how key features of federal retirement

policy—set in statute—affect pension costs.

At your request, we are responding to a series of questions about federal

and nonfederal retirement programs. This report addresses the part of

your request that concerns pension costs and retirement policy. As agreed

with your office, our objectives were to (1) determine the number of

federal retirees, if any, whose pensions have come to exceed the final

salaries that they earned while working; (2) explain why these retirees’

pensions came to exceed their final salaries; and (3) determine 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 also determine any difference in the number of retirees

whose pensions would have exceeded their final salaries.1

We collected data for the Civil Service Retirement System (CSRS) and the

Federal Employees Retirement System (FERS) general employees, as well

as for all former Members of Congress who were retired and still living as

of October 1, 1995, using a computerized personnel database and case file

information maintained by OPM. Although the preliminary results for

Members appear to be about the same as the results for general

employees, as agreed with your office, we are reporting the results for

general employees in this letter, and we will report on Members

1

The COLA policies we refer to in this report were set by various federal statutes.

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separately. We used a number of different approaches to meet our

objectives, including simulation and statistical analyses of a randomly

selected, projectable sample of CSRS retirees. The sample and techniques

that we used are described in greater detail in the Scope and Methodology

section of this report.

Background CSRS and FERS are the two largest retirement programs for federal civilian

employees. At the beginning of fiscal year 1995, these programs covered

about 2.8 million federal employees, or 90 percent of the current civilian

workforce. OPM administers CSRS and FERS. CSRS and FERS pension benefits

are financed partly by federal agency and employee contributions and

partly by other government payments to the Civil Service Retirement and

Disability Fund.2

Although CSRS and FERS both provide pensions, the programs are designed

differently. CSRS was established in 1920 and predates the Social Security

system by 15 years. When the Social Security system was established,

Congress decided that employees in CSRS would not be covered by Social

Security through their federal employment. CSRS is a stand-alone pension

program that provides an annuity determined by a formula as well as

disability and survivor benefits.3

 The program was closed to new entrants

after December 31, 1983, and, according to OPM actuaries, is estimated to

end in about 2070, when all covered employees and survivor annuitants

are expected to have died. FERS was implemented in 1987 and generally

covers those employees who first entered federal service after 1983 as well

as those who transferred from CSRS to FERS. The primary impetus for the

new program was the Social Security Amendments of 1983, which required

that all federal employees hired after December 1983 be covered by Social

Security.4 FERS is a three-tiered retirement program that includes Social

2

The Department of the Treasury also makes annual payments that are to cover interest on unfunded

liabilities, payments for spouse equity, as well as amortization payments to finance supplemental

liabilities for FERS.

3

If a survivor annuity benefit is chosen, pensions may be reduced by as much as 10 percent. Pensions

are reduced to provide for spousal benefits or insurable interest benefits (i.e., a person designated by

the retiree as expecting to receive some financial benefit from the continuance of the life of the

retiree), but not for children’s benefits. Children’s benefits are provided by law and do not need to be

elected by an employee or retiree. If a spousal survivor annuity is chosen and the spouse predeceases

the retiree, the annuity reduction is eliminated upon notification to OPM. At the time of retirement,

CSRS pensions may also be reduced for other reasons, including reductions for age and unpaid

deposits. FERS pensions may be reduced for age.

4

After December 31, 1983, certain rehires participating in CSRS before 1984 could elect to either stay in

that plan under special rules that integrate CSRS and Social Security or transfer to FERS. For a more

detailed discussion of the transition from CSRS to FERS, see Federal Retirement: Federal and Private

Sector Retirement Program Benefits Vary (GAO/GGD-97-40, Apr. 7, 1997).

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Security and a Thrift Savings Plan —in addition to a basic pension. Like

CSRS, FERS provides disability and survivor benefits.

A distinctive feature of CSRS and FERS pensions is the annual COLAs they are

to provide. COLAs are post-retirement increases in pension amounts that

generally are given on either an ad hoc or automatic basis to offset

increases in living costs due to inflation. Congress enacted the first

automatic COLA for CSRS annuitants in 1962 (effective January 1963). At that

time, the automatic adjustment was viewed as a way of controlling

pension costs, because prior ad hoc adjustments had been criticized as

being unrelated to price increases and subject to political manipulation.

Although COLAs generally have been provided on an automatic basis since

1962, COLA policies have been modified numerous times over the years. As

shown in table 1, the changes made during the 1960s and 1970s were

intended to enhance pension purchasing power with respect to inflation as

measured by the consumer price index (CPI), but some of the changes

made during the 1980s had the effect of reducing purchasing power.5

 Table

1 is based on information in the Congressional Research Service (CRS)

Report for Congress, 94-834 EPW, updated March 13, 1996.

5

The CPI is compiled by the Bureau of Labor Statistics and is intended to measure the average change

in the prices paid by urban consumers for a fixed market basket of goods and services. It is calculated

monthly for two population groups, one consisting only of wage earners and clerical workers and the

other consisting of all urban families. The wage earner index—CPI-W—is the index used for federal

COLA purposes. Because it is a national average, it affects retirees differently, depending on whether

they live in areas where the CPI-W differs from the national average. Also, because the CPI is a

statistical average, it may not reflect an individual’s experience, particularly an individual whose

expenditures differ greatly from the “average” consumer’s. Moreover, whether the CPI accurately

estimates inflation is currently being debated. In a 1996 report, the Advisory Commission to Study the

Consumer Price Index concluded that the CPI overstates inflation. The Commission recommended

that the market basket on which the CPI depends be updated more frequently than is currently done

and that adjustments be made to correct any bias in the estimates.

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Table 1: Major Changes Made to COLA

Policy Since Automatic Adjustments

Began

Year Public law Description

1962 P.L. 87-793 Provided the first automatic adjustments whenever the

CPI in a given year exceeded the CPI for the year of the

last adjustment by 3 percent or more. This was later

modified to provide for adjustments whenever the CPI

rose 3 percentage points or more above the CPI in the

month of the last adjustment and remained at or above

this level for 3 consecutive months.

1969 P.L. 91-93 Added an extra 1 percent to the adjustment—known as a

kicker—to offset the erosion in pension benefits due to the

time lag between increases in living costs and benefit

adjustments.

1976 P.L. 94-440 Repealed the kicker because it had been found to

overcompensate for inflation. However, Congress

replaced the kicker with semiannual COLAs as another

way to address the time lag.

1981 P.L. 97-35 Replaced semiannual COLAs with annual COLAs based

on the change in the CPI from December to December

and payable in March of the following year, thereby

saving money by having benefits held constant for longer

periods.

1982 P.L. 97-253 Added a restriction in certain cases to ensure that

pensions would not exceed the current maximum pay for

a General Schedule (GS) 15 federal employee.

1983 P.L. 98-270

(enacted in

1984)

Established the formula upon which COLAs currently are

based and made COLAs effective in December of the

current year and payable in January of the following year.a

1984 P.L. 98-369 Specified that COLAs were to be payable in checks

issued the first business day of the month following the

month for which they are scheduled or effective.

1985 P.L. 99-177 Suspended COLAs for fiscal year 1986 and for all

subsequent years in which specified deficit reduction

targets would not otherwise be met.

1986 P.L. 99-509 Reinstated COLAs for programs that had been subject to

the suspension under P.L. 99-177 for calendar years

1987-1991.b

1993 P.L. 103-66 Changed the effective dates for COLAs from December

to March for fiscal years 1994 through 1996.c

aThis formula and schedule are the same as those used for Social Security COLAs, which were

established for that program in P.L. 98-21. This law also eliminated the COLAs scheduled for May

1984 and June 1985. Instead, COLAs were scheduled for December 1984, payable in January 1,

1985, checks.

bThe Balanced Budget and Emergency Deficit Control Reaffirmation Act of 1987 (P.L.

100-119) permanently exempted federal pension COLAs from suspension under P.L. 99-177.

cThe COLAs were in checks payable the first business day of April rather than January. This law

did not change the CPI measuring period.

Source: CRS.

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One of these changes provides especially relevant background for

considering the relationship between current pensions and final salaries

and requires a more complete discussion. As noted in table 1, P.L. 97-253

(the Omnibus Budget Reconciliation Act of 1982) restricted COLAs in

relation to final salaries in certain cases. Under this restriction, a pension

may not be increased by a COLA to an amount that exceeds the greater of

the current maximum pay for a GS-15 federal employee or the final pay of

the employee (or high-3 average pay, if greater), increased by the overall

annual average percentage adjustments (compounded) in rates of pay of

the general schedule for the period beginning on the retiree’s annuity

starting date and ending on the effective date of the adjustment. In effect,

the statute requires that a retiree’s pension is to be capped at an amount

not to exceed the maximum pay of a general schedule employee (i.e.,

GS-15) or an amount that represents the value of the retiree’s final or

average pay, adjusted for the general schedule pay adjustments that had

been provided since the annuitant retired. According to OPM’s policy

handbook, because the cap applies to COLA increases to pensions, in no

instance would a pension already exceeding the cap be reduced.6

As noted earlier, under current policy—enacted in 1984—COLAs for CSRS

and FERS retirees are based on increases in living costs as measured by the

CPI-W between the third quarter (July through September) of the current

calendar year and the third quarter of the previous year. Although the COLA

formula and schedule are the same for FERS and CSRS, FERS COLAs are

limited if inflation is over 2 percent. If inflation is between 2.0 and

3.0 percent, the FERS COLA is 2.0 percent; if inflation is 3.0 percent or more,

the COLA is the CPI minus 1 percent. If, however, inflation is less than

2 percent, FERS COLAs are to be fully adjusted for inflation. Also, CSRS

benefits are to be fully indexed from the time of retirement, and FERS

pensions are to be indexed beginning at age 62 for regular retirees.7

Results in Brief 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. However, when their salaries were

adjusted for inflation—i.e., expressed in constant dollars—no retiree was

6

Under CSRS, initial annuities are also capped. As described in greater detail later in this report, with

certain exceptions, the maximum initial annuity that a retiree can receive under CSRS is 80 percent of

his or her high-3 average salary.

7

The first FERS COLA was effective in December 1988 and payable in January 1989. FERS participants

of any age who retired on disability are to receive COLAs after their first year of disability.

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receiving a pension that was larger than his or her final salary. 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.

Although no retiree’s pension exceeded his or her final salary in constant

dollar terms, our 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. The first two factors in combination

reflect retirement policies that are intended to maintain most or all of a

pension’s purchasing power. Although the COLAs that the sample retirees

received caused their pensions to increase at rates that generally were to

equal inflation during retirement, their unadjusted final salaries remained

the same. Thus, the longer the annuitants had been retired, the more COLAs

they would have received and the more likely their pensions would have

come to exceed their unadjusted final salaries. Also, because COLAs were

to be automatic and inflation continued throughout the period we

reviewed, the number of COLAs that the sample retirees would have

received was highly correlated with the number of years that they had

been retired. The third factor—a retiree’s years of federal service—also

contributed, because years of service is a major component in determining

the amount of a retiree’s initial pension. Specifically, the sample retirees

with many years of service would have received initial pensions that came

closer to the amounts of their final salaries than the retirees with fewer

years of service, other factors being equal. Smaller beginning differences

between initial pensions and final salaries, in turn, would have caused the

pensions of the first group of retirees to have exceeded their unadjusted

salaries sooner than the second group’s pensions.

Our 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. It also

suggests that the effects COLA policies actually have had on retiree pension

amounts cannot be summarized easily because of the numerous changes

that have been made in COLA policies over the past 35 years. COLA policy

changes have affected individual retirees differently, depending on when

their retirements began. For example, because the effects of COLAs and

COLA policy changes compound over time, the COLA policies of the late

1960s and 1970s, which overcompensated for inflation, will continue to

affect the pensions of those retirees who receive them as long as they are

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alive, just as the suspensions of some COLAs in the 1980s will continue to

be reflected in the pensions of anyone who retired before the suspensions

occurred.

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 pensions that they actually received, and the pensions of other retirees

would have been larger. Our comparison of the effects of current and

historical COLA policy (as shown in table 1) 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. The

changes that would have occurred in the sample retirees’ pension amounts

under current policy were enough to cause about a three percentage point

(3.0) increase in the number of retirees whose pensions would have come

to exceed their unadjusted final salaries.

Scope and

Methodology

To respond to your request, we used a computerized personnel database

of CSRS and FERS retirees and case file information maintained by OPM. At

the time of our analysis, the latest available data were for living CSRS and

FERS annuitants who were retired as of October 1, 1995. The database and

case files provided much of the information that we needed for our

analysis, including the retirees’ initial and 1995 pensions, retirement dates,

high-3 average salaries, service histories, survivor benefits, and other

retirement-related information. However, the database did not have

information on retirees’ final salaries, which we needed in order to

compare their final salaries to their 1995 annuities. The database did have

information on “high-3” average salaries, which are used in calculating

initial pensions. Thus, we compared the retirees’ high-3 average salaries to

their 1995 pensions to identify a set of retirees whose pensions were most

likely to have exceeded their final salaries. From this group, we selected a

random sample of 400 from among the 524,435 CSRS retired general

employees whose annuities exceeded their high-3 average salaries and all

105 FERS retired general employees for whom the database reported

annuities exceeding their high-3 average salaries.8

 We reviewed the

selected retirees’ case files to verify that those we had selected had 1995

pensions that, in fact, exceeded their unadjusted final salaries.

8

We did not sample from the 66 CSRS annuitants whose high-3 average salaries were listed as zero in

the database.

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From our review of the sample of 400 CSRS annuitants, we identified 348

whose 1995 pensions exceeded their final salaries. We identified and

removed from our sample 50 with pensions below their final salaries, 1

whose case file did not have the data we needed for our analysis, and

another whose case file was not available for our review. From our case

file review of the 105 FERS annuitants, we identified and removed 104 that

did not match our criterion (i.e., did not have a 1995 annuity that exceeded

the retiree’s final salary). The remaining case had a pension that exceeded

the final salary. However, the pension combined both FERS and CSRS

benefits. This retiree had transferred from CSRS to FERS and thus was

receiving benefits that were neither wholly FERS nor wholly CSRS.

Consequently, we included this individual in our estimates of the number

of retirees who had annuities that exceed their final salaries, but excluded

this individual from our regression analysis.

We weighted the CSRS sample results to estimate the number of retired

general employees in the population whose pensions had come to exceed

both their final salaries and high-3 average salaries. In making these

estimates, we assumed that the small number of FERS and CSRS cases for

which data were not available were similar to the cases that we had

reviewed. The sample results thus estimate the total number of general

employees whose pensions exceed both their final salaries and their high-3

average salaries. As the final salary is generally included in the three

highest salaries that are averaged, these employees are described as

having pensions that exceed their “final salaries” in the remainder of the

report. 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.

To understand why retiree pensions could come to exceed unadjusted

final salaries as much as they did, we used regression analysis to model

the relationship between key retirement policy variables and the extent to

which the pensions of the sample retirees exceeded their unadjusted final

salaries. Regression is a statistical technique that can be used to measure

the relationship between a dependent variable and a set of independent

(i.e., explanatory) variables and isolate their independent effects. This

analysis was based on the subsample of 348 CSRS employees whose 1995

pensions exceeded their final salaries. This subsample did not include the

single FERS annuitant whose pension exceeded the final salary, the two

sampled cases with missing information, nor the 50 sampled cases whose

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1995 pensions did not exceed their final salaries.9 We used the percentage

by which the retirees’ pensions exceeded final salaries as the dependent

variable in the model, because our sample did not include retirees whose

pensions were below their high-3 average salaries.10 We selected

retirement variables to use as independent variables because they were

(1) required to be used for computing pension benefits (e.g., years of

service); or (2) known to affect pension amounts for some or all retirees

(e.g., COLAs and the selection of spousal survivor benefits).11 Although

variables representing changes in a retiree’s personal circumstances (e.g.,

marriage, death of a spouse, or divorce) that would have changed his or

her pension over the period of retirement were not included in the final

regression model, we reviewed the retirees’ case files to determine what

effects these changes may have had on individual sample retirees. We

found that these changes in personal circumstances could cause an

individual retiree’s pension to fluctuate (e.g., increase and/or decrease)

during his or her retirement depending on whether survivor’s benefits

were being deducted.

To compare the effects of current and historical COLA policy on retirees’

pensions, we reviewed federal retirement-related documents and

identified the historical changes in COLA policy since the inception of

automatic COLAs in 1962.12 Using this information, we calculated the

pensions that the sample of 398 retirees would have received each year

from 1962 through 1995 had current COLA policy been in effect without

interruption. We compared these results to the pensions that they would

have received under actual COLA policy, absent other changes that might

have affected their pensions (e.g., adjustments due to death of a spouse

when survivor benefits had been chosen). We then compared the resulting

numbers to assess the probability that the change, if any, in the number of

retirees whose 1995 pensions had exceeded their unadjusted final salaries

was statistically significant, that is, unlikely to be due to sampling error.

9

Our regression estimates are not applicable to the larger population of all retirees, because no FERS

participants and no retirees with 1995 pensions lower than their high-3 average salaries were included

in the analysis.

10More than two-thirds of all annuitants retired in 1995 received pensions that were below their high-3

average salaries.

11It is important to note that the model’s parameter estimates of the effects of the retirement policy

variables are for those retirees whose 1995 pensions had come to exceed their final salaries. Had all

retirees been used, the parameter estimates could have been different because the analysis would have

examined instances in which retirees’ 1995 pensions had not come to exceed their final salaries.

12Payment of COLAs specified by the current COLA policy enacted in 1984 has been interrupted

several times since then, as shown in table 1. Our simulations of current COLA policy did not include

these interruptions.

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To illustrate the effects that the different COLA policies could have had on

pensions during the sample annuitants’ retirements, we simulated the

effects of current and actual policy on pension amounts for three different

retirement periods. To simplify the analysis, our simulation of the impacts

of current COLA policy implemented without interruption since 1984 was

not adjusted to reflect the actual effective dates of COLAs, the actual pay

dates, “lookback” payments or adjustments, or prorated to reflect the

month an employee retired.13 We selected 1961 to 1995, 1968 to 1995, and

1981 to 1995 to show the cumulative effects that the COLAs of the 1960s and

1970s, which overcompensated for inflation, and the suspensions of COLAs

in the 1980s could have had for different periods of retirement. We used

the average initial pension for the sample annuitants who had retired in

the first year of each of the three periods for our starting pension amounts

(e.g., the average initial pension of those annuitants who retired in 1961).

Our analysis had several limitations. As agreed with your office, we did not

independently verify the accuracy of OPM’s database. However, we did

verify the accuracy of the data for the cases used in our analysis. Also, the

number of retirees whose pensions had come to exceed their final

unadjusted salaries could be somewhat higher than we estimated for two

reasons. As noted, we used high-3 average salary to identify a population

that we believed would be most likely to have pensions that had come to

exceed final salaries, because OPM’s computerized database did not include

final salary information. Thus, our estimates do not include those retirees

whose pensions were lower than their high-3 salaries but whose pensions

were higher than their final salaries. Also, the annuity amounts contained

in the case files already had survivor benefit reductions, if any, taken.

Thus, retirees who selected survivor benefits would have had higher initial

pensions than the pensions reported in OPM’s files. However, we could not

take this reduction into account, because the automated data file did not

identify those retirees who had selected this benefit. On the basis of our

examination of the data and our knowledge of the key retirement policy

variables used in our analysis, we believe that any such underestimate

would have been small.

We requested comments on a draft of this report from the Director of OPM,

and those comments are discussed at the end of this letter. We did our

13The lookback adjustment, or comparative annuity computation, was established by P.L. 93-136 and

applied to retirees whose immediate annuities commenced on or after July 2, 1973, and before

January 20, 1981. Under this COLA provision, a retiree was assured that his or her annuity would be no

less than it would have been if the annuity had commenced on the effective date of the COLA and had

included the increase payable on that date. P.L. 96-499 eliminated the lookback adjustment and,

instead, provided for the proration of a retiree’s initial COLA increase.

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review from December 1995 to July 1997 in Washington, D.C., according to

generally accepted government auditing standards.

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.14 Our estimate of the

number of these retirees whose 1995 pensions exceeded their final salaries

differed, depending on whether we adjusted the retirees’ final salaries for

inflation. When we did not adjust the salaries for inflation, about 459,000,

or 27 percent, of the total general employee retirees received pensions that

in nominal dollars exceeded their final salaries. 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. Constant dollars are

especially appropriate for comparing current pensions and final salaries,

because the number of years that the annuitants in our sample had been

retired averaged 22 years and ranged from 8 to 42 years. Table 2 compares

the 1995 pensions and the nominal and inflation-adjusted final salaries for

three illustrative retirees in our sample. The illustrative pensions shown in

the table are the average amounts received by those sample annuitants

who had retired in the years 1961, 1968, or 1981.

Table 2: a Comparison of the 1995

Pensions and Final Salaries Presented

in Nominal and Constant Dollar Terms

for the Average Annuitants Who

Retired in 3 Selected Years.

Nominal dollar terms Constant dollar terms

Retirement year

1995

pension

Final

salary

1995 pension

as a percent of

final salary

Final

salary

1995 pension

as a percent of

final salary

1961 $21,102 $ 7,290 289 $36,291 58

1968 $22,211 $10,175 218 $43,580 51

1981 $24,064 $21,594 111 $35,372 68

Source: GAO analysis of OPM data.

14About 97 percent were CSRS retirees. Of the approximately 12,000 FERS annuitants added to the

retirement rolls in fiscal year 1995, about 30 percent had prior CSRS service.

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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. Two factors—the number and size of the COLAs that the retirees

had received and the number of years that they had been

retired—contributed because they helped to cause the retirees’ pension

amounts to increase over time. The third factor—years of federal

service—contributed because years of service was used in computing the

retirees’ initial pensions. Our regression model showed that the value of

the COLAs that the sample retirees received, as determined by the number

and size of COLAs and the length of employees’ retirement, together with

their years of federal service, explained about 82 percent of the variation

in the percentage by which the retirees’ pensions exceeded their

unadjusted final salaries. The important role that COLAs and length of

service played is a predictable consequence of pension policies that are

designed to reward employee service and maintain the purchasing power

of pensions.

During retirement, the retirees’ pensions increased because the COLAs that

the retirees were to receive increased in number. The amount of the

increase each year fluctuated according to changes in the CPI-W. In

contrast, unadjusted final salaries remained unchanged. Thus, the longer

the annuitants had been retired, the more COLAs they received and the

more likely it was that their pensions exceeded their unadjusted final

salaries. In fact, the average annuitant in our sample had been retired

about 22 years and had received 26 COLAs. The 4 percent who had retired

before 1963 had received 36 COLAs.

Generally, the likelihood that a retiree’s pension exceeded his or her

unadjusted final salary increased when the annuitant had been retired

during periods of high inflation, because larger COLAs were given during

these periods.15 Our model showed that, on average, a 1 percentage point

increase in the total value of the COLAs that a retiree had received would

result in a 0.5 percentage point increase in the amount by which the

retiree’s pension exceeded his or her final salary, other factors being

equal.16 In particular, more than 90 percent of the retirees in our sample

15As noted, although CSRS and FERS COLA policies differ from each other and from COLA policies of

the past, these differences do not affect whether a pension would come to exceed an unadjusted final

salary, but rather, when.

16In considering these and the other regression results in this report, it is important to recognize that

the results can be applied only to those retirees whose 1995 pensions had come to exceed their

unadjusted final salaries.

Page 12 GAO/GGD-97-156 Relationship Between Retiree Pensions and Final Salary
B-270600 

had been retired during all or part of the 1969 through 1980 period when

the most frequent and largest COLAs were given. Over this 12-year period,

pensions increased by 166 percent in nominal terms. Appendix I provides

a summary of COLA history since automatic COLAs were enacted in 1962.

The number of years of federal service also contributed to the explanation

of why some retirees’ pensions exceeded their unadjusted final salaries,

because years of service is included in determining the percentage of

high-3 average salary that a retiree ultimately will receive as his or her

initial pension. For example, under CSRS, an employee who had 41 years,

11 months of service at retirement would have been entitled to receive

80 percent of his or her high-3 average salary—the maximum percentage

allowed—while an employee who had worked 30 years would have been

entitled to receive 56.25 percent.17 As a result, the longer a retiree had

worked for the federal government, the closer the retiree’s initial pension

would have been to his or her unadjusted final salary. Nineteen (5 percent)

of the retirees in our sample had worked 40 years or more for the federal

government, and another 288 (83 percent) had worked 20 to 39 years. The

remaining 41 (12 percent) worked 5 to 19 years.18 Our model showed that

on average, a 1-year increase in a retiree’s federal service time would

result in about a 3.7 percentage point increase in the percentage by which

the retiree’s pension had exceeded his or her final salary, other factors

being equal.

A final factor—whether a retiree had chosen a survivor’s annuity

benefit—helped to explain why some retirees’ pensions had come to

exceed their unadjusted final salaries as much as they did. As noted in the

background section of this report, an employee who chooses a survivor

annuity benefit can have his or her basic annuity reduced by as much as

10 percent. As a consequence, if two retirees retired in the same year and

had the same final salaries and years of service, but only one had chosen a

survivor annuity benefit, the retiree who elected not to take the benefit

would have had a pension that exceeded his or her unadjusted final salary

sooner than the retiree who had chosen the survivor benefit.19 An

17CSRS retirees may receive additional service credit for unused sick leave, which would allow them to

exceed the 80-percent rule. In contrast, FERS does not have a maximum percentage base. The formula

used to calculate initial annuities under FERS provides a lower annuity than the one used under CSRS.

Thus, it is unlikely that someone who has government service solely under the FERS pension plan

would receive as much as the maximum percentage base allowed under CSRS.

18The vast majority (76 percent) of these annuitants retired under disability.

19Also, retirees who had chosen a survivor’s annuity benefit and who became divorced or whose

spouses died during their retirement would have exceeded their final salaries sooner than they

otherwise would have because their pensions were increased due to a change of marital status.

Page 13 GAO/GGD-97-156 Relationship Between Retiree Pensions and Final Salary
B-270600 

employee who chose a survivor annuity benefit would have reduced the

initial pension and thus increased the gap between the initial annuity and

the final salary. Of the CSRS retirees in our sample, 48 percent were not

having survivor benefits deducted from their pensions.

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.20 If current policy

had been in effect for all retirees in the sample, the number of retirees

whose pensions would have exceeded their unadjusted final salaries

would have increased by about 3 percentage points.

The Effects of COLA

Policies Would Have

Differed, Depending on

When Annuitants Retired

The following examples compare the pensions that retirees would have

received under current versus actual COLA policy by simulating the effects

that changes in COLA policy would have had on pension amounts, other

factors being equal. The examples cover three different periods—1961 to

1995, 1968 to 1995, and 1981 to 1995—and show how the impacts would

have varied, depending on the period of retirement.21 In considering the

meaning of the figures, it is important to recognize that the trend lines

refer to current versus historical CSRS COLA policy. FERS lines were not

presented because, as stated earlier in this report, none of the FERS retirees

received an annuity that was based solely on his or her FERS participation.

Figure 1 shows the relative effects of current and actual policy for a CSRS

participant who retired in 1961. As the figure shows, if the current policy

had been in effect without interruption, the retiree’s pension would have

been smaller over the period. Our analysis showed that by 1995 the

retiree’s pension would have been 6.3 percent smaller than it was under

the actual COLA policy. However, as the gap shown between the 1995

pension and the unadjusted final salary amount makes clear, such a

20The margin of error is plus or minus 5 percent with a 95-percent confidence interval.

21As stated in the scope and methodology section of this report, we used the average initial pension for

the sample annuitants who retired in the first year of each period as the starting pension amount for all

three figures. However, the amount that we used for the beginning pension did not matter because, in

percentage terms, the impacts would have been the same for any beginning annuity that we selected.

Page 14 GAO/GGD-97-156 Relationship Between Retiree Pensions and Final Salary
B-270600 

reduction would not have been nearly enough to have caused the retiree’s

pension to fall below his or her final unadjusted salary.

Figure 1: Comparison of the Effects of Actual COLA Policy and Current COLA Policy, Had It Been in Effect for the Average

Sampled CSRS Employee Who Retired in 1961

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

20,000

22,000

Annuities (dollars in thousands)

Feb. '63

Jan. '66

Feb. '67

June '68

Apr. '69

Dec. '69

Oct. '70

July '71

Aug. '72

Aug. '73

Feb. '74

Aug. '74

Feb. '75

Sept. '75

Apr. '76

Apr. '77

Oct. '77

Apr. '78

Oct. '78

Apr. '79

Oct. '79

Apr. '80

Oct. '80

Apr. '81

Apr. '82

May '83

'84

Jan. '85

'86

Jan. '87

Jan. '88

Jan. '89

Jan. '90

Jan. '91

Jan. '92

Jan. '93

Apr. '94

Apr. '95

Years in retirement

Years in which semiannual COLAs occurred

Actual paid policy (CSRS)

Current COLA Policy (CSRS)

Final salary

'61

'62

'64

'65

Source: GAO analysis of OPM data.

Page 15 GAO/GGD-97-156 Relationship Between Retiree Pensions and Final Salary
B-270600 

Figure 2 shows similar results for an annuitant who retired in 1968. In this

example, our analysis showed that the retiree’s pension would have been

3.5 percent smaller if current policy had been in effect without

interruption. The reduction in this annuitant’s pension is less

proportionally than the reduction in the pension of the annuitant who had

been retired since 1961 (shown in fig. 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. Again, the reduction would not

have been large enough to cause the retiree’s 1995 pension to fall below

his or her unadjusted final salary.

Page 16 GAO/GGD-97-156 Relationship Between Retiree Pensions and Final Salary
B-270600 

Figure 2: Comparison of the Effects of Actual COLA Policy and Current COLA Policy, Had It Been in Effect for the Average

Sampled CSRS Employee Who Retired in 1968

'68

Apr. '69

Dec. '69

Sept. '70

July '71

Aug. '72

Aug. '73

Feb. '74

Aug. '74

Feb. '75

Sept. '75

Apr. '76

Apr. '77

Oct. '77

Apr. '78

Oct. '78

Apr. '79

Oct. '79

Apr. '80

Oct. '80

Apr. '81

Apr. '82

May '83

'84

Jan. '85

'86

Jan. '87

Jan. '88

Jan. '89

Jan. '90

Jan. '91

Jan. '92

Jan

. '93

Apr. '94

Apr. '95

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

20,000

22,000

Years in retirement

Years in which semiannual COLAs occurred

Actual paid policy (CSRS)

Current COLA policy (CSRS)

Final salary

Annuities (dollars in thousands)

Source: GAO analysis of OPM data.

The third example (fig. 3) shows the results for an annuitant who retired in

1981. The retiree’s pension would have been larger if current policy had

been in effect without interruption. As the figure shows, under actual

policy, the retiree did not receive a COLA in 1984 or 1986, which caused this

retiree’s pension to fall somewhat short of the pension that he or she

would have received had current policy been in effect. Because the effects

Page 17 GAO/GGD-97-156 Relationship Between Retiree Pensions and Final Salary
B-270600 

of these suspensions continued to be reflected in the pension amounts that

the retiree received in subsequent years, by 1995 the retiree’s pension

would have been 1.4 percent larger under current, compared to historical,

COLA policy.

Figure 3: Comparison of the Effects of

Actual COLA Policy and Current COLA

Policy, Had It Been in Effect for the

Average Sampled CSRS Employee

Who Retired in 1981

1981 4/82 5/83 1984 1/85 1986 1/87 1/88 1/89 1/90 1/91 1/92 1/93 4/94 4/95

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

20,000

22,000

24,000

26,000

Years in retirement

Actual paid COLA (CSRS)

Current COLA policy (CSRS)

Final salary

Annuities (dollars in thousands)

Source: GAO analysis of OPM data.

Page 18 GAO/GGD-97-156 Relationship Between Retiree Pensions and Final Salary
B-270600 

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. When we estimated what the

sample retirees’ pensions would have been if current policy had been in

effect without interruption, we found that about 29 percent of retirees

would have had annuities that exceeded their unadjusted final salaries,

compared to about 26 percent under the actual policy simulation.22

Although the difference was quite small, it was statistically significant.23

The two estimates differed by about 3 percentage points in part because

the effects of COLAs on pension amounts are cumulative and compound. In

particular, the suspensions of COLAs during 1980s tended to offset the COLA

policies of the 1960s and 1970s that overcompensated for inflation.

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.

Although COLA policies of the 1960s and 1970s overcompensated for the

effects of inflation as measured by the CPI, COLA policies of the 1980s

sometimes under-compensated. 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. Generalization is

difficult, in part because no one COLA policy has ever been implemented for

a sustained period. For example, although the current underlying policy

22Since legislative changes made after 1984 did not permanently affect the COLA formula or schedule,

we did not include them in our analysis of current COLA policy. However, these changes were

included in our actual COLA policy analysis. Thus, because our simulation of COLA policies used the

initial annuity as the starting point for adding COLAs, our simulation did not include any adjustments

(e.g., loss of survivor’s annuity benefit due to spouse’s death) to annuities subsequent to the

calculation of the initial annuity. When these adjustments are considered by using the annuity received

in 1995, the percentage of those retirees exceeding their final salaries is 27 percent.

23Of the 398 sample cases for which data were available, 38 had pensions that were below their final

salaries under actual COLA policy but above their final salaries under current COLA policy. None of

the sample retirees whose pensions were above their final salaries under actual COLA policy had

pensions below their final salaries under current COLA policy. The estimate that about 3 percent more

of the pensions would have exceeded final salaries under current COLA policy compared to actual

COLA policy is surrounded by a 95-percent confidence interval that extends from about 2 to 4 percent.

Page 19 GAO/GGD-97-156 Relationship Between Retiree Pensions and Final Salary
B-270600 

has been in effect since 1984, Congress has modified this policy several

times for limited periods to help reduce the deficit. Also, the effects of

many individual COLAs and COLA policy changes are cumulative and

compound over time. As a consequence, COLA policy changes have affected

individual retirees differently, depending on when they retired. In

particular, the effects of the COLA policies of the 1960s and 1970s that

overcompensated for inflation will continue to have an effect on retiree

pensions for as long as those who received them are alive, just as not

receiving scheduled COLAs in 1984 and the suspension of COLAs in 1986 will

continue to be reflected in the pensions of anyone who retired before

these years.

Agency Comments

and Our Evaluation

We received oral comments on a draft of this report from OPM on July 16,

1997. OPM officials who provided comments included Federal Retirement

Benefits Specialists from the Retirement Policy Division and a Program

Analyst from the Retirement and Insurance Service. These officials

generally concurred with the information and conclusions presented in

our report. In particular, they agreed that using constant dollars, rather

than nominal dollars, is a more meaningful way to compare retiree

pensions to final salaries and that the statutory factors that are designed to

maintain pension purchasing power and reward employees with longer

service play a major role in determining whether pensions come to exceed

nominal final salaries. These officials also provided a number of technical

and clarifying comments, which we incorporated into this report where

appropriate.

We are sending copies of this report to the Ranking Minority Member of

your Committee and the Chairmen and Ranking Minority Members of the

Subcommittee on International Security, Proliferation, and Federal

Services, Senate Committee on Governmental Affairs; and to the

Subcommittee on Civil Service, House Committee on Government Reform

and Oversight. Copies of this report are also being sent to the Director of

OPM and other parties interested in federal retirement matters and will be

made available to others upon request.

Page 20 GAO/GGD-97-156 Relationship Between Retiree Pensions and Final Salary
B-270600 

Major contributors to this report are listed in appendix II. If you have any

questions, please call me at (202) 512-9039.

Sincerely yours,

Michael Brostek

Associate Director, Federal Management

 and Workforce Issues

Page 21 GAO/GGD-97-156 Relationship Between Retiree Pensions and Final Salary
Contents

Letter 1

Appendix I 

Summary of COLA

History Since

Automatic COLAS

Were Enacted in 1962

24

Appendix II 

Major Contributors to

This Report

26

Tables Table 1: Major Changes Made to COLA Policy Since Automatic

Adjustments Began

4

Table 2: A Comparison of the 1995 Pensions and Final Salaries

Presented in Nominal and Constant Dollar Terms for the Average

Annuitants Who Retired in 3 Selected Years.

11

Figures Figure 1: Comparison of the Effects of Actual COLA Policy and

Current COLA Policy, Had It Been in Effect for the Average

Sampled CSRS Employee Who Retired in 1961

15

Figure 2: Comparison of the Effects of Actual COLA Policy and

Current COLA Policy, Had It Been in Effect for the Average

Sampled CSRS Employee Who Retired in 1968

17

Figure 3: Comparison of the Effects of Actual COLA Policy and

Current COLA Policy, Had It Been in Effect for the Average

Sampled CSRS Employee Who Retired in 1981

18

Abbreviations

COLA cost-of-living adjustment

CPI consumer price index

CPI-W wage earner index

CRS Congressional Research Service

CSRS Civil Service Retirement System

FERS Federal Employees Retirement System

OPM Office of Personnel Management

Page 22 GAO/GGD-97-156 Relationship Between Retiree Pensions and Final Salary
Page 23 GAO/GGD-97-156 Relationship Between Retiree Pensions and Final Salary
Appendix I 

Summary of COLA History Since Automatic

COLAS Were Enacted in 1962

Measuring period

Effective

datea

Date

paidb

CSRS

COLA

FERS

COLAc

* 1/63 2/63 5.0 -

** 12/65 1/66 6.1 -

** 1/67 2/67 3.9 -

** 5/68 6/68 3.9 -

** 3/69 4/69 3.9 -

** 11/69 12/69 5.0 -

** 8/70 9/70 5.6 -

** 6/71 7/71 4.5 -

** 7/72 8/72 4.8 -

** 7/73 8/73 6.1 -

** 1/74 2/74 5.5 -

** 7/74 8/74 6.3 -

** 1/75 2/75 7.3 -

** 8/75 9/75 5.1 -

** 3/76 4/76 5.4 -

June-December 1976 3/77 4/77 4.8 -

December-June 1976/77 9/77 10/77 4.3 -

June-December 1977 3/78 4/78 2.4 -

December-June 1977/78 9/78 10/78 4.9 -

June-December 1978 3/79 4/79 3.9 -

December-June 1978/79 9/79 10/79 6.9 -

June-December 1979 3/80 4/80 6.0 -

December-June 1979/80 9/80 10/80 7.7 -

June-December 1980 3/81 4/81 4.4 -

Dec. 1980-Dec. 1981 3/82 4/82 8.7 -

Dec. 1981-Dec. 1982 4/83 5/83 3.9d -

3rd qtr. 1984-3rd qtr. 1983e 12/84 1/85 3.5 -

3rd qtr. 1985-3rd qtr. 1984 12/85 1/86 0.0 -

3rd qtr. 1986-3rd qtr. 1985 12/86 1/87 1.3 -

3rd qtr. 1987-3rd qtr. 1986 12/87 1/88 4.2 -

3rd qtr. 1988-3rd qtr. 1987 12/88 1/89 4.0 3.0

3rd qtr. 1989-3rd qtr. 1988 12/89 1/90 4.7 3.7

3rd qtr. 1990-3rd qtr. 1989 12/90 1/91 5.4 4.4

3rd qtr. 1991-3rd qtr. 1990 12/91 1/92 3.7 2.7

3rd qtr. 1992-3rd qtr. 1991 12/92 1/93 3.0 2.0

3rd qtr. 1993-3rd qtr. 1992 3/94 4/94 2.6 2.0

(continued)

Page 24 GAO/GGD-97-156 Relationship Between Retiree Pensions and Final Salary
Appendix I 

Summary of COLA History Since Automatic

COLAS Were Enacted in 1962

Measuring period

Effective

datea

Date

paidb

CSRS

COLA

FERS

COLAc

3rd qtr. 1994-3rd qtr. 1993 3/95 4/95 2.8 2.0

3rd qtr. 1995-3rd qtr. 1994 3/96 4/96 2.6 2.0

Legend

* = Adjustments made whenever the CPI in a year exceeded the CPI in the base year by

3 percent or more.

** = Adjustments made whenever the CPI in a month rose by at least 3 percent over the month of

the last adjustment and remained at or above that level for 3 consecutive months.

aThe “effective date” column indicates the month the COLA went into effect.

bThe “date paid” column indicates the month the retiree received the COLA.

cAll disability retirees (and survivors) and nondisability retirees age 62 or over. (The first FERS

COLA was effective in December 1988 and payable in January 1989.)

dThe COLA rate was 3.3 percent for nondisabled retirees under age 62.

eDue to a change in the adjustment period, no COLA paid in 1984.

Sources: OPM and CRS.

Page 25 GAO/GGD-97-156 Relationship Between Retiree Pensions and Final Salary
Appendix II 

Major Contributors to This Report

General Government

Division, Washington,

D.C.

Margaret T. Wrightson, Assistant Director

Gregory H. Wilmoth, Senior Social Science Analyst

Dallas Field Office Tyra J. DiPalma, Senior Evaluator

Enemencio S. Sanchez, Evaluator

Acknowledgement In addition to those named above, Jerry T. Sandau, Social Science Analyst,

GGD, contributed through his development of the regression analysis

results presented in this report.

(410004) Page 26 GAO/GGD-97-156 Relationship Between Retiree Pensions and Final Salary
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