In response to a recent article on the possible percentage increase of a 2008 pay raise for federal employees, one reader wanted to know: “How much will federal retirees get in 2008 for a pay raise?”
Technically, of course, retirees do not get a pay raise. But they do get a cost of living increase (COLA for short). Either way, it amounts to more money in the check you get from the government. The difference is that the COLA increase is determined by a formula that is automatically applied each year. A retiree wil not know until late in the year how much of an increase there will be in next year’s retirement check. The Department of Labor calculates the change in the Consumer Price Index (CPI) for urban wage earners and clerical workers from the third quarter average of the previous year to the third quarter average for the current year.
Unless you can accurately predict this rate of inflation for this index that is compiled by the Labor Department, you will not know how much of an increase you will see in your January retirement check. But you can check out the amount of inflation for the previous month and determine how that would impact your retirement check as of that month.
For example, right now, the cost of living increase for January would be 2.4 percent. That is because the consumer price index referenced above is 2.4 percent higher than the 2006 third quarter average base index.
According to the National Active and Retired Federal Employees Association (NARFE), the rate of inflation for June was the lowest monthly inflation figure for 2007. If inflation continues to go up, your retirement check will be higher in January. If inflation should go down, the percentage of the increase, if any, will be lower than 2.4 percent.
In some years, the amount of the increase for retirees has been higher than it has for active federal employees. A number of readers refer to the annual pay increase that is routinely given to federal employees as a COLA increase. Technically, that is not correct. Congress and the Administration decide how much to increase federal pay for the coming year. Inflation may be one factor in that decision but it is hardly the only factor used and it is probably not the most important factor. In effect, the pay raise to be given to federal employees in the coming year is a political decision. That decision is not always made prior to the start of a year and, in some years, the decision about a new pay raise for current federal employees is made several months after the year has started.
Some retirees have sent in comments that the annual COLA increase does not reflect the actual changes in their expenses. In other words, the cost of products and services used by retirees may be increasing more than the rate of inflation. That is true for many or most retirees.
The cost of health insurance and medical services, for example, has been going up higher than the cost of many electronic components. Anyone shopping for a new 60 inch high definition TV set has seen prices drop dramatically in recent years. But the cost of health insurance is not directly influenced by the wage costs in China or South Korea. While the cost of many consumer goods had dropped because of globalization, that does not reduce your medical payments. Your annual COLA increase is determined by a wide variety of products and services so a retiree may find it costs more to live this year (unless a substantial portion of your expenses went for a new TV and stereo system). (See COLA’s, Inflation and Planning Your Retirement)
If the final figures were calculated today, a federal retiree who receives the full COLA increase would get 2.4 percent. Chances are, active federal employees will get an average increase next year of 3.5%. Neither of these figures is final–just a stepping stone on the way to the final calculation that will not be known in either case for a few more months.