Calculating Your 2013 COLA
by Ralph Smith |
A number of readers have asked about a possible increase in their retirement annuity payment or Social Security payment starting in January 2013. In short, they want to know if they will get an increase and, if so, how much they will receive.
No one knows yet what the COLA increase, if any, will be and we won’t know the answer to these questions until October. There was no COLA increase in 2010 or in 2011. In 2012, CSRS employees received up to 3.6%. (See How to Calculate Your 2012 COLA Payment) The Congressional Budget Office recently predicted a 1.3% increase in 2013. But, if you are retired, we can speculate with some degree of certainty that your standard of living will decline unless you have another source of income. Here’s why.
If the increase were to be announced today (ignoring the next four months of probable changes), the COLA increase would be about 1.5%. What will happen in the next several months is anyone’s guess but the 1.3% figure referenced above is probably as good a guess as we will have for now.
When you eat in a restaurant or buy food at a grocery store, you will have noticed an increase in prices over the past few months. In some cases, prices have remained the same but manufacturers have cut down on portion sizes to remain profitable while keeping prices at the same rate despite inflationary pressure.
Depending on where you live, housing prices may have bottomed out and, if you live in one of the most prosperous areas of the country, like the Washington, DC metropolitan area, housing prices are going up again.
Anyone who has shopped for a TV set, furniture or various household goods in recent years has noticed that prices are dropping for many items. Workers in China, India, Eastern Europe and other parts of the world work for lower wages and benefits than workers in the United States. Our manufacturing jobs have been going overseas because it is cheaper and easier in many cases to build products overseas and then import them back into the United States.
If you are retired, chances are you are paying more for medical expenses and medical insurance than you paid a couple of years ago and may not be buying a house or adding to your elaborate TV/music playing set-up in your retirement entertainment cave even though these items are partly responsible for a lower cost of living increase.
If you think your actual expenses are going up more than 1.3% or so, perhaps you are correct. A private website that tracks inflation shows the real inflation rate of more than 4% by eliminating what it refers to as the “biased and often-manipulated government reporting”—presumably because it is the government’s intent to lower future payments and adding even more dollars to the massive federal deficit.
Depending on your health insurance plan, your increase in medical insurance payments have probably been going up at a higher percentage rate than any COLA increase you have been getting or will get in January.
For example, in 2010, health insurance premiums increased by an average of 8.8%. There was no COLA payment for that year. In 2011, when there was again no COLA increase, the average federal employee paid 7.2% more for health insurance. This increase, according to the OPM director, was good news because the government had added more requirements for federal insurers and the increase was less than it had been in 2010. In 2012, when the full COLA was 3.8%, the health insurance rates went up another 3.6%, on average, for federal employees.
As the government has been requiring insurance companies to include more benefits, and more tests and services may now be available, costs generally go up even though the cost is spread out among everyone who uses the federal health insurance plan.
One obvious example: Why should a couple with no children pay the same amount for health insurance as a family of five people? The answer is because the government is spreading out the cost to make it more affordable for families. As is often the case, someone else is paying to reduce the cost for those who are enjoying the benefits.
Most readers can probably count on their health insurance costing more in 2013. No doubt, some readers will shop around for a less expensive plan to try to curb these escalating costs. If you choose to do this, your expenses may actually go down although you may have less insurance available if you have medical issues. To help you make the best decision for your own circumstances, when the new rates become available, we will provide the information so you can begin shopping around for the best deal for your individual situation.
Interest rates are now being held to artificially low levels by the Federal Reserve. The Fed is trying to get people to invest in stocks and borrow money at low rates to stimulate the economy by buying stuff. The printing of money by the government to keep rates low is suppressing the underlying rate of inflation, at least for the near future. Economists disagree on the long term impact of this policy but the end result will probably be a significant impact on our economy and our standard of living in the next few years when the artificial economic stimulation ends.
In the meantime, retirees would be well advised to conserve their assets, cut expenses where possible to do so, and avoid spending financial reserves to meet your routine living expenses. The COLA payment you receive in January, if any, will not cover your actual increase in expenses and these costs will have to be made up from other sources of your income or your financial reserves.
The Federal Employee Pay Raise
To try to eliminate any confusion, the COLA payment applies only to federal retirees, not to currently employed federal workers. If you are a federal employee who is still working for Uncle Sam, you are certainly aware that there has been a freeze in basic pay rates for the past two years although many readers may have received a promotion, a bonus payment or a within-grade increase.
We do not yet know if there will be a pay increase in 2013. The Obama administration has proposed a raise of 0.5% but that has not been approved by Congress. If the usual scenario is played out this year, we will not know the amount of any raise in 2013 until very late in the year.
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by Ralph Smith |