Thanks to a slight drop in July living costs, the tentative inflation-catch up for millions of retired Americans now stands at 1.8 percent, down slightly from the previous month. This time in July, after the Labor Department announced the Consumer Price Index for June, the cost of living adjustment (COLA) was tentatively set at 1.9 percent.
There are still two months — August and September — to go in the COLA countdown. The final figure for those months will determine how big an adjustment retirees — federal, military and those under Social Security — will get next year. Benefits for people under Social Security, the military retired pay system and the federal CSRS retirement plan are pegged to changes in the CPI from the current third quarter (July, August and September) over the previous year’s CPI. They get the full amount of the increase each January.
U.S. government workers who retired under the newer FERS program don’t get COLAs until they reach age 62. Then they can be reduced by as much as 1 percentage point compared to the regular COLA for other retirees.
Although the prospective January 2015 COLA had dropped — from 1.9 percent last month to 1.8 percent this month — it is still a bigger adjustment than the likely January 2015 pay raise for white collar feds. Although nothing is set in concrete yet, it is likely the nonpostal civil servants will get a pay raise of 1 percent next year. That’s the same amount they got in January 2014, and that came after a three-year pay freeze imposed by the White House and Congress.
Many people confuse the retiree COLA with the federal pay raise. They are totally unrelated. COLAs are set by law and are automatic. They are designed to keep retirees current with inflation. Pay raises are political creatures determined by lots of things, including the jobs market, private sector pay and fiscal considerations. A raise and a COLA are rarely the same amount. And when and if they are, it is purely coincidence.
Following the elections, Congress and the White House are likely to make a big push for a new (money-saving) way to determine future COLAs for Social Security, the government and military retirees. Both the Obama administration and House Republicans have endorsed dropping the current CPI-W (the Consumer Price Index for Urban Wage Earners and Clerical Workers), and instead using something called the Chained-CPI. Backers say the switch, which would have to be made in law, would more realistically reflect how retirees act when prices for certain items rise. Opponents say it is a way to shave billions of dollars off of future COLAs for retirees.
The National Active and Retired Federal Employees has estimated that any switch to the chained CPI form of measuring inflation would cost the typical CSRS retiree $50,000 over a 20-year lifetime of retirement. For an explanation of how the COLA-CPI system works, click here.
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