The "Chained CPI" and Your Federal Retirement Package

By on April 7, 2013 in Current Events with 110 Comments

FedSmith has run articles on the chained CPI previously. In the past, it may not have been as of much interest to some as it could have been. When a proposal first surfaces, it seems like a remote possibility that will not have much of an impact.

But, as sometimes happens, a remote possibility can become a reality. And, when that reality hits, it could impact your future retirement income.

The chained CPI now looks more like a reality than it did a few short weeks ago.

The president’s budget proposal now provides for a chained CPI. His proposal follows a similar proposal by the House Republican Study Committee to adopt the chained CPI. With support in both parties for the measure, we can assume there is a possibility that this proposal has an increased possibility of becoming a reality.

What is the Chained CPI?

While the usual consumer price index (CPI) deals with the rise and fall in fixed items, a “chained CPI” would also consider  choices people may make as a result of changes in their behavior. For example, if the price of beef goes up, many people will buy chicken instead because it may be a substitute that costs less. Also, when the price of a product goes up, people will probably buy less of that product.

The chain weighted CPI incorporates changes in both the quantities and prices of products. When it comes to calculating costs for multibillion dollar programs like Social Security, a chained CPI is likely to mean that benefit increases do not rise as much. Over time, benefits, payments, and pensions that are adjusted with CPI calculations could all fare differently under chained CPI rules.

Savings to the Government—and Less Money for Those Receiving Benefits

The savings to the federal government would be significant. The Republican Study Committee budget was projected to cost the federal government $9.2 billion less over ten years.

If you are a current federal employee or a retired federal employee, you would be impacted by a chained CPI when it comes time to receive your future retirement payments. Each year, federal retirees benefit from a cost of living allowance. In most years, this results in an increase in the amount of money received by a retiree. In 2013, this current COLA calculation resulted in an increase of 1.7% for most people receiving Social Security or a CSRS pension payment.

What would the impact of this change be on a federal retiree?

Robert Benson wrote an article recently to calculate this impact on a typical federal retiree. (To see the full discussion of this issue, read How Bad is the “Chained CPI”?)

Mr. Benson used as an example a newly retired Federal employee who is 62.  He was in the FERS retirement system and he retired after 30 years, with a high-three salary of $57,272.  His annuity would be 33% of $57,272, or $18,900 annually. Over a 20-year time span, this hypothetical employee received annual COLAs 0.3% lower than the full CPI. Under this scenario, his annuity would be 5.6% less.  His cumulative loss over 20 years would be $17,197.

The actual decrease could be more or less but the decrease of 0.3% is a reasonable assumption to illustrate how it would impact a retired federal employee. Obviously, an employee with a higher or lower high three salary would be impacted differently.

The CPI and Retirees

The reality that faces many retirees is that the current method of calculating retirement payments does not reflect their true expenses. The chained CPI would accentuate this disparity between actual living expenses and the amount of money paid to the retiree.

Here is the problem for a retiree.

If you are about 70 and living on a fixed income (no promotions or within-grade increases after retirement!), you are unlikely to be buying the same kind of new products 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 incorporating the latest in technology, a luxury car or new furniture built in a Chinese factory, prices may have gone down so inflation is lower. Lower prices expand your purchasing power and you may have more items to improve your standard of living.

On the other hand, the cost of health care has gone up. In 2013, Medicare Part B premiums went up, in some cases by almost 30%. Health insurance has gone up each year and, generally, the percentage of the increase is higher more than the average COLA increase. Retirees are likely to use medical services more than younger people. As a result, the cost of your health care and your expenses may have gone up after retirement.

Under the regular consumer price index, transportation is 18% of the index; education is 6% and medical care is only 6%. Retired folks are often more likely to be going to a doctor or a hospital or paying for prescriptions than that are paying for a college education or buying a new car.

So, in effect, if the chained CPI does become a reality, you may want to rethink the amount of money you will need to last for the rest of your life.  The current method of determining a COLA may not reflect your true expenses. The chained CPI will likely accelerate this loss of purchasing power as you may be receiving smaller increases in the future than you had anticipated.

Why is This Happening?

Most of us think out daily lives will not change much from what we currently experience and consider to be normal. That expectation may be true but it does not have to be so. And, while we can expect soothing reassurances from our elected officials who want to stay in office, the reality may be that we will continue to experience unpleasant changes as a result of our overall economic situation and growing government debt.

Perhaps the current economic concerns are just a blip in the continuing success of the American economy. Or, perhaps, since we are now the world’s largest debtor, our standard of living will suffer if or when we come to grips with attempting to get our debt and spending under control.

In any case, since the future is uncertain, those who are retired or plan on retiring in the near future would be wise to preserve their assets and plan a financial future conservatively when nearing retirement.

© 2016 Ralph R. Smith. All rights reserved. This article may not be reproduced without express written consent from Ralph R. Smith.


About the Author

Ralph Smith has several decades of experience working with federal human resources issues. He has written extensively on a full range of human resources topics in books and newsletters and is a co-founder of two companies and several newsletters on federal human resources.

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  1. flashbyte says:

    Blame on Bush……..

  2. Bob Johnson says:

    Call it the “dog food index”. Can’t afford steak? Buy hamburger. Can’t afford hamburger? Buy Alpo. Can’t afford health care? Die, and reduce the surplus population. The chained CPI is the invention of a soulless economist and championed by The Heritage Foundation. Nice heritage..

  3. Eo Utnac says:

    CPI fails to take into account a retirees “other” expenditures that DO continue to rise: transportation costs, not just fuel but upkeep (price of mechanics does not go down), automobile insurance, then too replacement of automobile when necessary (things do not last forever). These added to the ever increasing health care costs which include proper medication AND nutrition. Hey, chicken is NOT always the answer. Some of us worked 30-40-50 years under an agreement with our employer (Federal Government) that we would receive a certain amount plus annual COLAS as formulated at that time. We bypassed lucrative secular positions (have a Bachelor’s degree, two Masters, and a Doctorate) for the security of a federal annuity as then formulated.
    To go back on that promise now seems to be a willful and malicious break in the contract. Why don’t those selfsame lawmakers tending the henhouse address their own retirement formulas instead of the thousands if not millions of federal retirees who have worked hard for theirs.
    And, yes, medical costs DO rise. I’ve certainly found that to be true. Worked 42 years with the Postal Service. Started under the Eisenhower Administration and retired in 1999. Have been retired 14 years, and have never encountered as many health related costs as I do now.
    As they say in the sports world, “C’mon, man.”

  4. Itsjustmeagain1 says:

    When I signed on
    in 1967, the implied contract was a straight CPI. I am retired 8 years now with
    37 years of service and we’ll arbitrary change the contract because we’re told
    “we must all sacrifice because of the economy” but nowhere do I see
    anyone else outside of Govt sacrifice.
    Lets eliminate the Bush “buy your vote” tax cut.

  5. wbuie says:

    The theoretical calculation of impact was done on a FERS retiree.  I would expect that the impact on all CSRS retirees would be about twice that.  I think that this difference should be covered by an example so that those folks depending on CSRS retirement aren’t surprised by a significantly harsher impact than that in the FERS example.

  6. Wake up Feds says:

    This is terrible, I worked hard for 40 years to get the little bit I do received and now they are gradually going to take it all back.  Just want to remind our elected officials that they too will be old one day.

  7. G-Man says:

    Great article.  Blunt and to the point. 

  8. DaveDFAS says:

    COLA is meant  to  keep out standard of living stable.  “Chained CPI” is meant to codify the loss of purchasing power.  As stated in the article you buy chicken instead of beef.  Then again you never can buy beef again and the cattlemen go out of business.  It means our “tuna” will go from Star Kissed to 9-Lives.  The protection for those at 76 and above is a joke.  The average life expectancy is 70 to 72 which means most of the people will die before that happens.
    Just wait the “Boomers” will die off just as the WWII vets are.  Once we are gone who will be doing the spending to support the economy?

  9. te fr says:

    The only way the Chained CPI could possibly be more accurate than the CPI is if it becomes higher than the CPI when the economy is booming. If that won’t happen then people should quit saying it is more accurate and just say it is a way to save money. Perhaps people think the economy will never be good again.