What is Worse Than No COLA? A Small COLA

By on May 3, 2016 in Retirement with 120 Comments

Image of cash going down a drain

Federal retirees, still angry about the disparity in Medicare Part B premiums caused by the hold-harmless clause in the Social Security Act, are facing even higher premiums in January 2017 depending on decisions made by Medicare Trustees and on the inflation rate.

It is likely that Medicare Trustees will recommend another rise in Part B premiums to take effect in January 2017. Last year the Trustees estimated “an average annual Part B growth rate of 6.7 percent over the next 5 years.”

The second unknown factor is the rate of inflation. Currently, the inflation rate is -0.87 percent below the 2014 third-quarter average rate used to calculate Social Security and CSRS annuity increases, but some inflation is beginning to appear. For the 12 months ending in March, the CPI-W index has risen 0.5 percent compared to -0.6 percent for the same time period in 2015.

“There have been only three years when no COLA occurred, but on the other hand, all of them have occurred in the last seven years, so the issue of COLAs is becoming larger,” explained Jessica Klement, Legislative Director for the National Active and Retired Federal Employees Association (NARFE).

If the 2016 third-quarter inflation number remains at or below the 2014 third-quarter inflation number, there would be no COLA in 2017. Under the two-year budget deal struck in 2015, if there is no COLA in 2017, premiums will not rise for anyone covered by Medicare Part B regardless of the Medicare Trustees’ recommendations.

On the other hand, if there is a small increase in the CPI-W, Social Security recipients’ Part B premiums would rise only in an amount equal to their COLA. Premiums for non-Social Security beneficiaries would be raised substantially to offset smaller-than-needed premiums paid by Social Security recipients, plus absorbing any additional surcharges.

The result could be a disparity of 50 percent or more between Part B premiums for Social Security beneficiaries and non-Social Security recipients, since 70 percent of Part B beneficiaries are covered by Social Security and the Part B trust fund is legally required to be in financial balance.

If Trustees recommend an increase in Part B premiums this year, “a zero percent COLA would be in the best interest of federal retirees not protected by the hold-harmless clause,”). “A small COLA would have a greater [negative] financial impact on those not protected by the hold-harmless clause,” added Ms. Klement.

Possible Solutions

According to NARFE, the best solution is to change the formula used to determine cost-of-living adjustments from the current CPI-W index to the Bureau of Labor Statistics’ experimental CPI-E index, which NARFE believes more truly reflects expenditure patterns for seniors.

Unfortunately, it is unlikely that Congress will agree to that change. Deputy Legislative Director John Hatton said that it is more likely that Congress would change the COLA formula to the Chained CPI formula, which would actually lower COLAs.

Congress could also legislate an increase in benefits for retirees regardless of the inflation rate, which is also unlikely this year. “This is not a Congress that is chomping at the bit to give more benefits,” Ms. Klement explained.

NARFE is also considering calling for legislation that would extend the hold-harmless clause to cover everyone affected by Part B premiums, regardless of how they pay for those premiums. Whether Congress would agree to such a solution remains to be seen.

Referring to the current situation, one CSRS recipient asked: “If I paid into Medicare and into a federal pension system, why should I be treated differently than FERS [or Social Security recipients]?” In their opinion, “the disparate treatment of CSRS retirees who, like FERS retirees did not receive a COLA, is a violation of the Equal Protection Clause of the Constitution.”

Even some retirees receiving Social Security will be affected if their monthly benefit is smaller than the new Part B premium, which prevents having Part B premiums deducted from their Social Security benefit. As Part B premiums rise faster than their benefits, this group grows and includes retirees and survivors whose Social Security benefits are reduced due to the Windfall Elimination Provision (WEP) and the Government Pension Offset (GPO).

NARFE is currently supporting legislation (H.R. 711 the Equal Treatment of Public Servants Act of 2015) that would reform WEP.

“This bill would help mitigate the WEP penalty by providing some relief for both current beneficiaries through a rebate and future Social Security recipients by improving the formula going forward,” said NARFE President Richard Thissen.

Retirees will have to wait for the Medicare Trustees’ report in July to see if an increase in Part B premiums is recommended, and until October to see if the CPI-W index number moves sufficiently high to allow for a COLA under the current law.

Looking to the future, a person involved in the legislative process predicts that “if there is only a small COLA in 2017, things could get ugly.”

© 2016 Michael Wald. All rights reserved. This article may not be reproduced without express written consent from Michael Wald.

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About the Author

Michael Wald is an independent economics analyst and writer based in the Atlanta area. He specializes in topics related to business, labor, and human resources. Prior to his retirement from the U.S. Department of Labor, he served as the agency’s Southeast Regional Director of Public Affairs and Southeast Regional Economist.

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