This article was co-authored by Ralph Smith
As explained in a recent article, the president’s budget proposal calls for a chained consumer price index (CPI or “chained CPI”) to calculate future changes to the COLA for calculating the cost of retirement increases. President Obama’s 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 chance of becoming a reality. The proposal, if it were to be adopted, would apply to calculating the cost of living increase for Social Security and for any increases in federal retirement calculations.
Several readers wrote to ask several variations of the same question: “How much of a difference would the chained CPI make in my retirement calculation?”
The proposal would eliminate the use of another method for computing inflation when paying out retirement benefits (the CPI-W). As we have noted before, the current method of calculating inflation costs for future retirement payments does not reflect the actual costs that most retirees experience.
The chained CPI would further cut into the amount of any increase for federal retirees. Cutting through the technical jargon, the proposal would result in a cut in the benefits to retired federal workers and to those who are collecting Social Security.
How much of an impact would the change have on your future retirement?
Federal retirement expert Ann Vanderslice points out the following link to NARFE’s calculator that illustrates the cost of the chained CPI to future retirees:
- On $30,000 pension over 5 years you would lose $1,456
- On $30,000 pension over 10 years you would lose $5,872
- On $30,000 pension over 15 years you would lose $14,111
- On $50,000 pension over 5 years you would lose $2,426
- On $50,000 pension over 10 years you would lose $9,788
- On $50,000 pension over 15 years you would lose $23,518
While federal employees tend to get anxious about the prospect of changing the current high three annuity formula to a formula that uses the high five average salary, this change would not have the greatest impact on a federal retiree’s long term income. The greater impact would result from the proposal to move to a chained CPI.
When you think that the chained COLA would impact not only federal pensions but Social Security, the proposal to move to a chained CPI is a significant proposal that could impact your future retirement income.