What About Your 2011 COLA? Forget About It!

What is the current likelihood of a COLA increase in 2011? The prospects aren’t looking good. Here’s why.

Will there be a COLA increase in 2011 for federal retirees?

Anything is possible in an economic environment that has been unstable but it is highly unlikely.

In August, there was a 0.1 percent increase in the index of consumer prices used by the federal government to measure the cost of living.  Social security and federal government pension payments increase with increases in the cost of living. But, as many will assume, it isn’t that simple.

There is a cost of living adjustment or increase to Social Security and federal government pension payments at the beginning of each calendar year only if  the average of the index for the third quarter (July, August, and September) of 2010 is higher than the highest previous third quarter average (the highest previous third quarter average is from 2008.)

The current inflation rate, as measured by the inflation index used to calculate a COLA increase, is -0.6.

In plain English: there is no inflation as measured by the federal government. In fact, there is a small amount of deflation. The bottom line is that unless there is a spike in inflation in September, there will not be a COLA increase in 2011.

As many will remember, there was no COLA increase in 2010 either. (See What Happened to My COLA?) Some readers have asked if there has ever been a time when there was no COLA increase for two years in a row. That has not happened. In fact, if you look back at the history of the COLA, there was never a time when the increase was 0.0% as happened in 2010. Prior to 2010, the lowest COLA increase was 1.3% in 1998.

We do not yet know insurance premiums for the federal health insurance plans in 2011. Chances are, there will be an increase in these rates as there was last year. This will undoubtedly lead to comments that the current system is unfair and that retirees are being squeezed by inflation–despite the fact the government index used to measure inflation for the COLA shows a decrease in expenses. As we have pointed out before, the reason for this is that the index does not measure expenses most common for those in retirement.

Congress has been aware of this for some time and the solution to the problem already exists. There is another index that could be used. It is called the CPI-E (Consumer Price Index-Elderly). The use of  this index for calculating your Social Security or federal retirement annuity has not been authorized so your 2010 COLA will not increase. In fact, using the CPI-E would have an impact on the federal deficit which is already skyrocketing so much that the government of China is warning the United States that we cannot keep borrowing so much money.

As the federal debt is now going up more than $1 trillion each year, the chances of Congress passing a bill to add more to federal programs that are already in financial trouble seems very unlikely.

As there is not likely to be an increase in your COLA payment in 2011, and your health insurance premium is likely to go up to some degree, the best advice is to plan accordingly to accommodate your personal financial situation.

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. Follow Ralph on Twitter: @RalphSmith47