Your COLA for 2014: Higher or Lower than in 2013?

How much of a COLA increase will you see in 2014? How would the “chained CPI” impact this payment if it were enacted?

The cost-of-living adjustment in government benefits, including Social Security and federal retiree COLA payments, for 2014 is likely to be 1.5 percent. That figure is based on a recent estimate from the Congressional Budget Office. For those readers who pay attention to such things, the COLA for 2013 was 1.7%. There was no COLA in 2010 and 2011 but in 2012 there was  a 3.6% COLA for employees under the Civil Service Retirement System (CSRS) for those who had been receiving benefits for at least one year.

The final COLA figure for 2014 will not be known until the middle part of October. The increase, whatever it turns out to be, will become effective on December 1 and will be reflected in January 2014 paychecks.

To get the full COLA, a retiree or survivor annuity must have been initiated no later than December 31, 2012. If not, the increase is prorated under both CSRS and FERS plans. Prorated accounts receive one-twelfth of the increase for each month they received benefits. For example, if your benefit started on November 30, 2013, the prorated COLA would be one-twelfth of the full COLA.

Federal Employees Retirement System (FERS) and FERS Special Cost-of-Living Adjustments are not provided until age 62, except for disability, survivor benefits, and other special provision retirements. FERS disability retirees get the adjustment, except when they are receiving a disability annuity based on 60 percent of their high-3 average salary. Also, under FERS, if you have a CSRS component, the component is subject to the CSRS COLA calculation. FERS survivors receive the FERS increase on their entire annuity, even where component service is involved.

President Obama proposed a “chained CPI” for retirees in his 2014 budget request. If adopted, the changes would take effect in 2015. The president’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 possibility of becoming a reality. But, regardless of future action, the chained CPI would not impact the COLA increase in 2014.

What Does A Chained CPI Mean for Retirees?

A chain weighted CPI incorporates changes in both the quantities and prices of products. When it comes to calculating costs for huge programs like Social Security, a chained CPI is likely to mean that benefit increases do not rise as much. Over time, benefits, payments, and pensions that are adjusted with CPI calculations could all fare differently under chained CPI rules. The bottom line is that this would save a considerable amount of money for the government but it would also mean less money for retirees. The Republican Study Committee budget estimated that the federal government would save about $9.2 billion over ten years.

Under the federal retirement systems, different people would be impacted differently but here is one sample scenario.  The chained CPI has grown more slowly than the current method of calculation by about 0.25 percentage points over the past decade. If the chained CPI were to be implemented, benefits for Social Security payments would be about $3 per month lower in 2014, and about $30 a month lower by 2023, according to Congressional Budget Office calculations. And by 2033, Social Security payments are projected to be 3 percent lower than they would be using the current measure of inflation. For CSRS and FERS retirees, the loss may be greater because of the larger payments than many who receive Social Security benefits.

How Much of a Hit Would This Mean for Your Future Income?

Over time, of course, the loss of income would be greater the longer a person continues to receive benefits. (See Which Has More Impact on Retirement Income: High Five or Chained CPI?)  A report in U.S. News calculates that a person who claimed retirement benefits at age 62 would, on average, get a 0.25 percent smaller payment at age 63 under the chained CPI. After 10 years, this 73-year-old retiree would get 2.5 percent less, on average, than under current law. At 93, this person would get an average of 7.2 percent less in Social Security payments over his or her lifetime.

Here is a listing of the COLA payments from 1975-2012.

Federal Employee Pay Raise?

Keep in mind that the cost of living payments referenced in this article only refer to federal retirees. A pay increase, if any, for current federal employees will be determined through the political process and is separate from the COLA references in this article. (See Will You Get a Pay Raise in 2014?)

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