To many city folk, horses and mules look pretty much alike. But you’ll notice that all the entries in the upcoming Kentucky Derby are horses. Race horses. For a reason. Did you ever hear of a race mule?
By the same token, people who can’t tell a pay hike from a cost of living adjustment are going to get a sharp, up-your-wallet tutorial next January.
What probably going to happen is this:
Most white collar federal workers will get a pay raise. The only issue is how much. The White House proposed 2 percent, Congress is pushing for 2.9 percent, and the raise could be even more if military personnel get a higher amount.
People who are retired from the government, retired from the military, or who get Social Security benefits probably will not get any cost of living adjustment in January.
Pay raises are a political/budgetary decision based very, very loosely on a 1990 federal pay “reform” act that has been largely ignored by the last three Presidents. Last January, feds got a basic 3.9 percent pay raise that was adjusted upward in many cities because of locality pay differentials.
COLAs are what they say they are: A cost of living adjustment. They are inflation-protection adjustments which reflect the rise in living costs third quarter of the current year (July, August, September 2009) over the third quarter of the previous year. That would be July, August, September of 2008.
We’ve grown accustomed to living costs going up. People under Social Security, military and CSRS retirees got a 5.8 percent COLA in January of this year. FERS retirees got the 4.8 percent diet COLA.
Except for periods in the 1930s (like the Great Depression) and mid-1950s, inflation has been a fact of life. But there is such a thing as deflation, and when it hits, prices either fall or stabilize.
In October of last year, living costs as measured by the Bureau of Labor Statistics Consumer Price Index dropped 1.3 percent. They were down again in November (2.3 percent) and December (1.2 percent). Increases in January, February and March were modest and that, for the COLA, is the problem.
The point is that mid-way through the COLA countdown, the CPI is almost 4 percent lower than it was during the third quarter of 2008. In order to qualify for a January inflation adjustment, living costs would have to jump dramatically between now and September 30.
That’s the bad news for retirees.
The good news is two-fold:
Lower living costs, and/or deflation, are good for people with fixed and guaranteed incomes. Such as folks with steady jobs (like feds) or people who are retired on government-guaranteed annuities (like federal retirees).
The COLA elevator only goes one way: Up. When living costs rise, retirees get a raise. But when living costs drop, even dramatically, retirees do NOT see any decrease in their monthly benefits.
For more on the inflation vs. deflation issue, click here.
To tap into the COLA hotline the National Association of Active and Retired Federal Employees maintains for its members, click here.
For a more-than-you-probably-want explanation of the CPI, put a cold towel on your head and click here.