Switching to a lower CPI at first would mean a few hundred dollars less per year for federal retirees. But its effect would compound over the years and decades until eventually, some retirees would likely earn tens of thousands of dollars less than they would under the current method of setting COLAs. – Federal Times, December 18, 2012
The chained CPI (Consumer Price Index), a much-discussed method for saving money for the Government, is a slight, downward revision (0.25 – 0.30%) in the way the annual COLA (Cost of Living Allowance) for various groups receiving Federal payments is calculated. The rationale for smaller increases is that people faced with rising expenses make their own adjustments in spending, as a coping mechanism. So, COLA adjustments do not need to exactly match the rise in prices. This argument does not seem especially compelling, does it?
A stronger argument for the change is that the slight cut, spread across millions and millions of recipients, will save many billions of dollars. The money thus saved will help us out of the financial mess we are in.
Would the individual impact really be “tens of thousands” over time? To get this into perspective, let’s see how it works for an actual recipient, a Federal retiree. For our example, let’s take a newly retired Federal employee, age 62. He was in the FERS retirement system and he retired after 30 years, with a high-three salary of, say, $57,272. His annuity is 33% of $57,272, or $18,900 annually. Here is his first 20 years of annuity increases, with and without an assumed COLA decrease of 0.3%.:
| Year | 3.0% Increase | 2.7% Increase | Loss | Cumulative Loss |
|---|---|---|---|---|
| 1 | $19,467 | $19,410 | $57 | $57 |
| 2 | $20,051 | $19,934 | $117 | $174 |
| 3 | $20,652 | $20,472 | $180 | $354 |
| 4 | $21,271 | $21,025 | $246 | $600 |
| 5 | $21,909 | $21,593 | $316 | $916 |
| 6 | $22,566 | $22,176 | $390 | $1,306 |
| 7 | $23,243 | $22,775 | $468 | $1,774 |
| 8 | $23,940 | $23,390 | $550 | $2,324 |
| 9 | $24,658 | $24,021 | $637 | $2,961 |
| 10 | $25,398 | $24,670 | $725 | $3,686 |
| 11 | $26,160 | $25,336 | $824 | $4,510 |
| 12 | $26,945 | $26,020 | $925 | $5,435 |
| 13 | $27,753 | $26,723 | $1,030 | $6,465 |
| 14 | $28,586 | $27,445 | $1,141 | $7,606 |
| 15 | $29,444 | $28,186 | $1,258 | $8,864 |
| 16 | $30,327 | $28,947 | $1,380 | $10,244 |
| 17 | $31,237 | $29,729 | $1,598 | $11,842 |
| 18 | $32,174 | $30,532 | $1,642 | $13,484 |
| 19 | $33,139 | $31,356 | $1,783 | $15,267 |
| 20 | $34,133 | $32,203 | $1,930 | $17,197 |
Over a 20-year time span, then, the above hypothetical employee granted annual COLAs 0.3% lower than the full CPI, would see his annuity eroded 5.6%. His cumulative loss over 20 years would be $17,197. Considering the billions to be gained, is this acceptable?
- Disabled beneficiaries would, under current proposals, be exempted.
- During times of higher inflation, the 0.3% would be proportionately smaller. Example: if the “full” CPI is, say, 7%, then the adjusted, chained CPI would be 6.7%. Psychologically, this appears to be more tolerable than 1.4% compared to 1.1%.
- Above example uses 0.3% in all cases. The actual change may be only 0.25%, with a loss smaller than projected.
- If this change is implemented, it may make further, more painful losses less likely.
