Pay & Benefits

How a small change could have a big impact on federal retirement

The cost-of-living adjustments for federal retirees are currently calculated using the consumer price index for Urban Wage Earners and Clerical Workers (CPI-W), but other indexes exist that could potentially be used to change government retirement practices.

The CPI-W index has been criticized as both under-representing and over-representing the cost of living for retirees, as it neither accounts for consumer choice nor the costs specific to elderly Americans.

According to a Jan. 28 Government Accountability Office report, some of those indexes could cause small positive and negative changes to the retirement COLA system that can have large impacts over time.

“The change in benefits resulting from using an alternate index would have the largest relative effect on beneficiaries who receive benefits the longest and those with lower incomes. This is partly because changes to the COLA accumulate over time and because lower-income beneficiaries rely more on federal retirement programs, such as Social Security,” the report said.

GAO examined the impacts of using a Chained CPI-U index, which accounts for users ability to buy different products depending on price changes, and the CPI for the Elderly, which better reflects the spending habits of the elderly, to calculate retirement COLAs.

According to the GAO research, the Chained index would result in a six percent income decrease over 30 years for COLA recipients in the lowest income quintile.

Conversely, GAO found that the same household’s income would increase by 4 percent over 30 years under the CPI-E index.

Such estimates are not set in stone, as the Chained CPI-U index is inherently changeable and the Bureau of Labor Statistics lists CPI-E as an “experimental index.” The cost associated with making the CPI-E index official could reach up to $110 million per year.

The report also noted that changing the CPI could pose timeliness and cost challenges for the federal government.

“While this report focused on federal retirement programs, the information is relevant for other federal programs, as well. For example, by law the COLA for Social Security’s retirement program applies to some other programs, too,” the report said.

“The COLA for Social Security retirement benefits is the same as the COLA for Social Security disability benefits, and changes to that COLA trigger changes to the COLA for supplemental Security Income, Railroad Retirement Board pensions and Veterans Affairs pensions. The same issues could present themselves if other federal programs changed the CPI used for various program aspects, such as income eligibility levels or benefit amount.”

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