# Your COLA Increase for 2013: Less than 2%

The COLA increase for some federal retirees in 2013 will likely be between 1.5 and 1.7%. Here is an explanation.

If you are a retired federal employee and wondering how much your income will go up next year, those in the CSRS federal retirement system who qualify are probably going to end up getting between 1.5 and 1.7%. The final figure will be available October 16th but, without a doubt, the amount will be less than the 3.6% COLA  paid to retirees in January of 2012.

The rate will not be the same for all former federal workers. As is often the case with government benefits, you will probably need to diagram some of the sentences to understand the amount of the increase—even after the October 16th date. There was no COLA increase at all in 2010 or in 2011. (See What About Your 2011 COLA? Forget About It!)

Here is how the COLA percentage is calculated for some federal retirees:

• For Civil Service Retirement System (CSRS) or Organization and Disability Retirement System (ORDS) benefits, the increase percentage is applied to your monthly benefit amount before any deductions, and is rounded down to the next whole dollar.
• For Federal Employees Retirement System (FERS) or FERS Special benefits, if the increase in the CPI is 2 percent or less, the Cost-of-Living Adjustment (COLA) is equal to the CPI increase. If the CPI increase is more than 2 percent but no more than 3 percent, the Cost-of-Living Adjustment is 2 percent. If the CPI increase is more than 3 percent, the adjustment is 1 percent less than the CPI increase. The new amount is rounded down to the next whole dollar.

For those who want to know more about the calculation, visit the Office of Personnel Management website.

No doubt, there will be some who are disappointed at the small rate of increase based on the official inflation figures. The reality is that the financial security of retirees (including former federal workers) is being damaged by two factors.

First, many retirees live off of money they have saved during their working years. They use the interest they receive from their savings and try to avoid spending as much of the principle as they can each year. The problem is that interest rates are very low which is severely limiting the financial resources of those who are retired. For example, check out the annual interest rates on the G fund. From 1988 until 2002, the lowest interest rate in a year earned on the G fund was 5%. In several years, it was almost 9% per year. But, from 2009 – 2011, the interest rate on the G fund has always been less than 3%. It isn’t getting any better for retirees. So far in 2012 the year-to-date interest rate on the G fund: 1.02%.

The Federal Reserve has kept interest rates artificially low since 2008. In theory, this should be good for the economy. That has not appeared to have been as successful as we may have hoped. Moreover, according to Bill Gross, the head of the world’s largest bond fund manager, the artificially low rates are creating a more perilous financial system around the world.

Of course, most retirees are more worried about meeting their monthly expenses than the state of the world’s financial system but there is little doubt that the artificially low rates and your ability to pay your expenses in retirement are connected at some level. Moreover, low interest rates are good for governments because it enables them to borrow much more money than they could with higher interest rates.

Second,  the government has occasionally changed how it calculates inflation. The current method for calculating inflation that applies to Social Security and for federal retirees does not take into account the type of expenses more typical of older Americans such as more expenses for medical requirements. (See this article that includes a discussion of the CPI-E.) As some readers will quickly point out, the average health insurance rates for federal employees will be an average of 3.4% higher in 2013. In effect, while some appliances and homes may be less expensive, products such as gas and food are much higher. Chances are, most retirees are spending more on medical expenses than buying a 70 inch TV screen for a media room in their big new house in the suburbs.

As a point of reference, if your COLA was based on how the rate of inflation was calculated prior to 1980, the actual inflation rate would have been closer to 9% instead of under 2% (scroll down to the chart near the bottom of the page that is linked). That method would obviously create even more massive debt problems for the federal government as the rate of interest would be much higher than the rate currently being paid for borrowing money.

The increase for federal retirees will not apply to current federal workers.  There is current a pay freeze in effect for the federal workforce although it does not apply to within-grade increases, awards, or a salary increase due to a promotion. (See Pay Freeze to Continue Through March)

For some retirees who have parked most of their TSP investments into the G fund, the lower rates may mean they have to work longer than they would have had to work in order to have a secure financial future. For others, the annuity and their savings will receive will be sufficient. But, in planning for your retirement, be realistic about your expenses and your income. Your expenses are likely to go up faster, perhaps much faster, than your cost of living increase.