No COLA for 2011? A Technical Change Could Mean a Raise Next Year
Tuesday, January 19, 2010
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By David Huckabee
Federal retirees checking their bank balances this month are probably noticing they have taken a hit in their pensions because of health plan premium increases and the absence of a COLA in 2010.
Will things be better in 2011?
The answer is probably not. Health premiums will still go up and there may be little or no increase in pensions in 2011. We know this because the December 2009 urban and clerical wage earner consumer price index (CPI-W) is 1.76% lower than the cost of living computation quarter which will be used to compute the next COLA, and if current trends continue the COLA numbers will be in negative territory for 2011 also.
The Social Security system trustees and the Congressional Budget Office are also predicting little or no increase in benefits beginning in 2011.
How can this happen two years in a row? Won't Congress somehow fix things? After all, it's not just federal retirees who will learn they may not get a raise just before they vote in November. Social Security recipients may be facing a second year of no benefits increases as well, because both systems use the same formula to determine COLAs.
Older voters tend to be among the most likely to vote, especially in low turnout, off-year elections, so you would expect Congress to act to placate retirees who could vote to throw the bums out. There are several reasons why Congress will probably not change the status quo:
- Every year without a COLA reduces current and future budget deficits. Congress' solution to the no-COLA outcry in 2009 was the one-time $250 payment to be paid in 2010. Contrast this response to a permanent one such as changing the way COLA's are computed. A COLA increase is a gift that keeps on giving because a permanent increase becomes part of the base used in the calculation the next time a COLA is granted. A one-time payment does not.
- Congress' schedule is already jam-packed for 2010's short election-year session. Raises for retirees are unlikely to rise above the din of other interest groups seeking relief from Congress.
- Supporters of increased benefits to federal pensioners and Social Security recipients may not want to raise the issue of larger benefits in this period of enormous budget deficits because they are afraid of opening Pandora's box. Federal pensions and Social Security benefits have not always been as good as the current system, and sometimes they have been better. Before 1962, there were no automatic COLA adjustments of federal pensions. For the years beginning in 1976 until 1981, there were two COLAs a year. The early 1980s were the diet COLA years where COLAs were delayed as long as six months and in one year, non-disabled retirees had their COLAs reduced by 50%. Currently CSRS pensioners and Social Security recipients get the same COLAs. FERS retirees have their COLAs reduced if the increase is greater than 2%. Trying to change the formula for both federal retirees and Social Security beneficiaries could end up with Social Security recipients better off, and perennially unpopular Feds worse off.
If Congress does choose to act this year to ensure a benefits increase in 2011, what options does it have?
One approach would be another one-time payment. Another would be to raise all recipients benefits by an absolute or percentage amount. Yet another would choose a different index such as the experimental CPI-E (Elderly) index as discussed by FedSmith co-founder Ralph Smith on August 27 (Your 2010 COLA: Why Your Costs May Be Up But Your Income Goes Down).
A simple technical change to re-define the existing cost of living computation quarter in existing law might result in a modest to significant federal pension and Social Security raise in 2011.
This raise (perhaps between 0.76% and 2.2% based on current trends) could happen if the Congress and the President agreed to a modify in the cost-of-living computation quarter definition to one most observers thought was already in place.
Even the experts get it wrong.
For example, the Congressional Research Service (CRS), the part of the Library of Congress that works only for Congress, noted in two reports that the COLA calculation averaged the previous years July-September CPI-W numbers and compared them with the same period in the current year.
For example, OpenCRS.com includes the Oct. 16, 2008, version of a CRS report (94-803 EPW, Social Security: The Cost-of-Living Adjustment in January 2009), which says the Social Security COLA is based on the percentage change in the average CPI-W for the third calendar quarter of the previous year to the third calendar quarter of the current year.( p. 1)
Similarly, the October 16, 2008 version of CRS report 94-834 EPW, Cost-of-Living Adjustments for Federal Civil Service Annuities, says COLAs for CSRS annuities are based on the average monthly percentage change in the CPI-W in the third quarter (July to September) of the current calendar year compared to the third quarter one year earlier. (p. 2) The OPM web site frequently asked questions section describing how COLAs are determined for federal retirees still repeats this error in January 2010.
Actually, the cost-of-living computation quarter used to compute COLAs is the last such quarter that resulted in a benefits increase. Since there was no increase in 2010, the number used for the 2011 calculation will be the third quarter 2008 index number of 215.4 instead of 211 which would be the base index number used for the 2011 COLA if the law was written as the CRS experts reported to Congress, and OPM and most reporters describe the process to their readers.
The December 2009 CPI-W is 211.7 (0.33% higher than the July-September 2009 average.) If the COLA calculations compared CPI indexes from the current year to the previous year instead of the last time there was a COLA increase, projections based on the three most recent monthly CPI-W indexes for 2009 would indicate a possible 0.76% 2011 COLA increase, while a similar projection based on averaging the last eleven monthly CPI figures would yield a projection of a possible 2.2% COLA.
If Congress and the President fail to act to change the COLA calculation to the annual comparison most people still think is in effect, the same inflation projections noted above show no COLA in 2011.
Will Congress act before September 2010 to head off a potential election-year firestorm of disappointed Social Security recipients and federal pensioners when the learn there may be a second year of no COLA increases?
Probably not, because most Senators, Representatives, and their staffs are still not aware that a simple technical correction to the cost-of-living computation quarter would diffuse this political time bomb.
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David Huckabee retired from the Library of Congress as a Specialist In American National Government.
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