If you are a retired federal employee, you know you will not be getting a promotion or a within-grade increase this year. Presumably, you knew that would be the situation when you retired from your job with Uncle Sam.
And, if you are a remotely conscientious financial planner with your retirement income, you were probably also planning on paying more for your health insurance each year because of a probable premium increase.
But, again as a fairly conscientious financial planner, you may also have been planning on a pay increase added to your federal annuity payment each January. There is a basis for this assumption because there has been an automatic cost of living adjustment (COLA) every year since 1975. (Prior to 1975, any adjustment was set by legislation similar to how federal employee wage increases are now set.)
For 2010 though, you are unlikely to be getting any increase in your annuity payment. In fact, according to the trustees for the Social Security program, you may not be getting an increase in 2011 either if inflation remains low.
Perhaps the good news in this is that your payment won’t go down–even if the consumer price index shows that prices have deflated instead of inflated.
COLA’s Can Lead to Larger Increases for Retirees
In some years, such as 2009, federal retirees got a bigger pay raise than those employees still going to work for the federal government. In January 2009, there was a COLA adjustment of 5.8%. The average pay increase for working feds averaged 2.9%. (See Executive Order Issued on 2009 Pay Increase: Where Are the Biggest Winners Located? and 2009 COLA Jumping 5.8% for Some Federal Retirees)
That also happened in 2006 when federal employees received an average pay raise of 3.1% and the COLA for federal employees was 4.1%. It also happened in 2005. That year, the COLA increase was 4.1% and federal employees got an average pay raise of 3.1%.
The reason is because the annual adjustment for retirees is based on a consumer price index. It happens automatically. But the pay rate for active federal employees is based on legislative action. It isn’t automatic and it isn’t necessarily determined by the inflation rate.
What’s In the CPI?
So why was the increase in 2009 so high and why doesn’t the CPI reflect any inflation in determining next year’s COLA?
The answer lies to how the inflation rate is determined.
The CPI does not necessarily reflect the types of things that retirees are actually buying.
As an obvious example, your COLA increase was high this year because the price of oil went up dramatically in 2008. The reality is that you are probably not driving to work so your commuting costs as a retiree are not the same as when you hopped into your car every morning to drive to the federal building. That worked to your advantage last year. But, when oil prices dropped this year, that same factor worked against you.
Also, chances are if you are 70 or so and living on a fixed income, you may not be buying new products as you did when you were in your 30’s and 40’s. If you are in the market for a new widescreen TV with the best high definition picture, a luxury car or new furniture built in China, prices have probably gone down so inflation is lower. That may not help you though if you are not buying these items.
On the other hand, the cost of health care has gone up. Medical expenses are generally up about 3.2% in the past year. Retirees often use medical services more than younger people. As a result, the cost of your health care has gone up.
Under the regular consumer price index, transportation is 18% of the index; education is 6% and medical care is only 6%. I will go out on a limb and guess that retired folks are more likely to be going to a doctor or a hospital than getting a college education.
Solution to the Problem–And Creating New Ones
Congress has been aware of this for some time and the solution to the problem already exists. There is another index that could be used. It is called the CPI-E (Consumer Price Index-Elderly).
Under this index, the cost of medical care rises to 11%; education drops to 3% and transportation drops to 15%. Lesser weight is also given under this index to clothing and entertainment.
The Bureau of Labor Statistics (BLS), which calculates an experimental annual CPI-E, found it rose 126.5 percent from 1982 through 2007, compared to 110 percent for the consumer price index used now for COLA adjustments. This difference would represent a big increase in government expenses at a time when the federal budget deficit is already massive and getting much bigger with each passing day.
The 1987 amendments to the older Americans Act (1965) directed the BLS to develop an experimental index (CPI-E) for Americans 62 years of age and older. Legislation to use this index instead of the one currently in use has been introduced but it has never passed. There are some good reasons the CPI-E is not being used as the index does not represent all Social Security recipients (the same CPI used for federal retirees). Also, many workers do not start receiving Social Security benefits until they retire at age 65, while the CPI-E covers the entire population aged 62 and above.
For now, if you are a federal retiree, you can be thankful that you have gotten pay raises under the existing system on a regular basis. But, to be able to continue to pay your expenses, don’t plan on getting a higher paycheck in January. In fact, chances are you will have less money in your account as your health insurance fees are likely to go up again as well as your expenses going up for the items you actually use.