financial planner Stephen Zelcer

CSRS vs FERS - Full COLA, Diet COLA, or NO COLA (w/Video)

Read the video transcript:

Welcome back to the channel. So, FERS employees, I want to compare you to the CSRS system. I know you’ve heard about the CSRS system. I know. I know. You’re green with envy because you’ve heard that they got the sweet pension and you guys in FERS got gypped. I’m not gonna have any of that kvetching because mark my words, you guys in the FERS retirement system, especially those that were hired before 2013, mark my words, you will come out ahead of your CSRS counterparts.

Why do I say that? It’s true that the CSRS, they have the larger pension. It’s true. But, FERS, you have a smaller pension, you also have Social Security, and you also have your Thrift Savings Plan with the match. CSRS has Thrift Savings Plan, but they don’t have a match. As a result of that, I typically find a FERS TSP is double, if not triple, if not quadruple the size of a CSRS TSP. And the TSP is an asset that you control. The government doesn’t control that asset. That’s an asset you control. You take the income as you please. And also, when you pass away, that asset passes on to the next person in line. You could view it as intergenerational wealth.

Your pension and a CSR’s pension, that will last for the rest of your life. But when you pass away, yes, you could leave a survivor benefit for one person beyond that. However, when that person passes away, That’s gone. So the TSP is an asset that you can nurture, you can grow, you control, and you can pass it along for intergenerational wealth, as opposed to your pension, not so much.

So you’re right, CSRS, they have a larger pension. But you, with your pension, plus social security, plus your TSPs, which are usually double, triple, if not quadruple the size of a CSRS TSP, you will come out ahead of your CSRS counterparts. However, the CSRS, they get a full COLA. COLA stands for Cost of Living Adjustment.

On their pension, they get a full COLA. FERS people, you’re gonna get a COLA as well. You’re gonna get a COLA on your FERS pension. You’re gonna get a COLA on Social Security. Social Security will give you the full COLA. FERS, however, gives you a diet COLA. It’s not a full COLA, it’s a diet COLA. Now historically that has translated into your FERS pension rising at a inflation rate that is slightly behind the real measure of inflation.

The real measure of inflation is CPI, the consumer price index. So, you guys, instead of getting CPI, you get CPI minus, it’s usually minus one, but it’s not always minus one, sometimes it’s minus a fraction, sometimes it’s not minus at all. Historically, however, FERS people have been lagging CSRS people in their COLAs by a fraction of a percent, just a fraction.

Does that fraction add up over time? You better believe it. If you run the numbers, a CSRS person and a FERS person retiring in the same year with the same size pension, Many years later, let’s say about 20 years later, the CSR’s person would have about 10% more of a pension. All because of that fraction of a percent.

Now why am I telling you this? Is it just to rub it in? Is it just to make you feel bad that you get a diet COLA as opposed to a full COLA? No, no, no. There’s two reasons why I’m doing this. Reason number one, whenever you project your financials into the future, if anybody here has done any form of financial planning, you gotta project your numbers into the future.

And whenever you project into the future, your projections are always based on assumptions. You have to assume longevity. You have to assume a rate of return on your investments. You also have to assume whether you’re gonna get a COLA, or a diet COLA, or You could use what I use, which is no COLA at all.
Have you run your numbers yet? What assumptions did you use? Did you assume full COLA? Did you assume diet COLA? Or, do you do what I do, which is assume zero COLA? I assume zero COLA on CSRS pensions, FERS pensions. Even military pensions and social security. I assume zero COLA and I didn’t always assume a zero COLA.

I actually assumed diet COLA for many years up until 2020 Coronavirus. 20 million people lost their jobs. That means Social Security was not collecting revenue from 20 million Americans. So, that was a big hit on Social Security. And as we know, Social Security was already having financial issues. They were scheduled to run out of money in the year 2037.

Well, as of now, it looks like they’re gonna be running out of money in 2032, based upon whichever study you look at. Some people say 2032, some people say 2033. But nonetheless, Social Security is scheduled to run out of money. And when they run out of money, They’re going to be scaling back your benefits.

Right now the estimates are they’re going to scale back benefits by 21 to 24%. So social security is running out of money. And guess what? It’s not just social security running out of money. Even OPM is running out of money. How do I know? So you may have heard earlier in this presentation that I mentioned that the FERS employees, especially those that were hired before 2013, they are going to come out ahead of their CSRs counterparts.

Why did I specify 2013? What happened in 2013? Well, any new hires from 2013 onward, they’re in the FERS system. They’re getting the same FERS benefits as everybody else, but they’re paying for those benefits. Those who were hired before 2013, you’re paying 0.8% of your salary into the FERS retirement system.

Those were hired after 2013. Some of them, some of them are paying 4.4%. of their salary into the FERS retirement system getting the same benefits. Let me say that again. Those who were hired before 2013, you are paying 0.8% of your salary into the FERS retirement system. Those who were hired after 2013, some of them are paying 4.4% into the same FERS retirement system. They’re getting the same benefits, but they’re just paying much, much more. Why are they paying much more for the same benefits? Well, because OPM’s running out of money too. And so, they need more funds, they need more revenue, and so they’re just going to charge you more.

That’s why, when I project the numbers for Social Security, and for the FERS Pension, and even for the other fixed income sources, as I mentioned, CSRS, and military pensions as well, I assume, not a full COLA, not a diet COLA, no COLA at all. What do you assume? I’d love to hear your feedback in the chat box below.
Don’t forget to subscribe to the channel. I look forward to sharing with you more content.

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