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Retirees to receive 1.7 percent COLA beginning in January

Oct. 16, 2012 - 10:57AM   |  
By STEPHEN LOSEY   |   Comments
Federal retirees will receive a 1.7 percent cost-of-living adjustment to their pensions in January.
Federal retirees will receive a 1.7 percent cost-of-living adjustment to their pensions in January. (File)

Federal retirees will receive a 1.7 percent cost-of-living adjustment to their pensions in January.

The COLA is not as high as the 2.6 percent and 3.6 percent adjustments retirees received in 2012, but federal employee groups were relieved to receive any adjustment.

“We at NARFE [the National Active and Retired Federal Employees Association] are pleased to hear that retirees will receive some relief from the rising costs of everyday goods,” NARFE President Joseph Beaudoin said in a statement. “NARFE continues to support strong COLAs based on fair assessments of increases in consumer prices, including medical costs, to keep federal annuities in line with inflation.”

COLAs are based on the Consumer Price Index for Urban Wage Earners and Clerical Workers, an inflation measure put out by the Labor Department’s Bureau of Labor Statistics. They are based on the CPI-W during July, August and September of the current year compared against the same months in the previous year there was a peak in the inflation rate. The percentage difference between the two years — in this case, the difference between the 2011 and 2012 quarters — determines the amount of the COLA for Civil Service Retirement System retirees, and in some cases, Federal Employees Retirement System retirees. If the CPI-W increases by 3 percent or more, as it did at 3.6 percent last year, eligible FERS retirees receive the CPI-W minus one percentage point.

There was no COLA in 2010 and 2011 because weak economic conditions kept overall consumer prices flat or falling in 2009 and 2010. But for the last two years, increases in gasoline, energy and food costs have helped drive up consumer prices.

J. David Cox, national president of the American Federation of Government Employees, said the COLA “could have been much worse” if Congress had enacted the Simpson-Bowles deficit reduction plan. Erskine Bowles, who was President Clinton’s chief of staff, and former Sen. Alan Simpson, R-Wyo., in 2010 led a bipartisan commission that recommended switching Social Security, federal and military pensions, and other indexed provisions of the budget to a new method of determining the Consumer Price Index, called the chained CPI, which economists say provides a more accurate measure of inflation.

To set the CPI-W, BLS creates a so-called “market basket” of goods, such as cereal, milk, wine, clothing, gasoline, home electronics and college tuition. BLS tracks prices on those items over time and measures inflation based on the overall price changes.

But CPI-W doesn’t take into account “upper-level substitution bias” — the fact that most consumers change their buying habits when prices go up. For example, if the price of apples goes up, people are likely to buy fewer apples or switch to a cheaper fruit. And for that reason, economists say, the CPI-W overstates the amount of inflation each year.

BLS created the chained CPI in 2000 to fix that problem. The new method does consider upper-level substitution bias, and as a result, the chained CPI has been 0.25 to 0.30 percentage points lower each year, on average, than the standard CPI measurements. If adopted to calculate COLAs, it would cost federal retirees several thousand dollars in lower COLAs over a decade, and the effects would compound over time.

“If Bowles-Simpson were in effect today, retirees would be getting a 1.4 percent adjustment in January instead of the 1.7 percent increase,” Cox said. Although a 0.3 percent cut doesn’t sound like much, it adds up over time. Over 10 years, that 0.3 percent would mean a 3 percent cut in benefits. Over 20 years, the loss in benefits rises to 6 percent.”

Cox urged lawmakers to not revive the Simpson-Bowles recommendation or otherwise consider its suggestions to cut federal benefits.

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