It won’t be official until October 15th but, for the third time in the past 40 years, federal retirees, Social Security recipients and others that normally benefit from an annual cost of living adjustment (COLA) will not receive an annual increase in their income. There were also no COLA increases in 2010 and 2011. (See What Happened to My COLA for 2010? and What About Your 2011 COLA? Forget About It!)
As determined by the relevant data from the Bureau of Labor Statistics (CPI-W) in October 2014, federal retirees generally received a 1.7 percent COLA to their civil service annuities beginning in January 2015. Social Security benefits and military retirement annuities increased by the same amount.
The Consumer Price Index figure that is used to determine the annual COLA figure will be announced later this week. But the COLA will be zero in 2016 as prices have actually dropped from a year ago according to the inflation measure used for the COLA. Lower gas prices are the reason for the lack of inflation. Other prices measured by the inflation index would have to have gone up quite a bit in the last month and there is no indication that has occurred.
The 2016 COLA is determined by comparing the average of the July, August and September 2015 index figures to the average of the same months (the third quarter) from 2014. The percentage increase, if there is any increase, determines the COLA for the coming year. If inflation does not occur according to the government index that is used, the automatic increase does not occur.
As most readers know by now, an increase in health insurance costs for next year has already been announced. In fact, the increase in health insurance premiums will be the largest increase in five years.
As an overall average, the Office of Personnel Management (OPM) has announced the average premium increase in health insurance will be 6.4 percent in 2015. The average increase for participants, however, will be increasing 7.4 percent.
Some federal retirees will opt for the self plus one insurance plan that will be available for the first time in 2016 but, even with this change, many will find their actual health insurance costs will still be higher than last year despite the new option. In addition, for at least some plans, deductibles and co-pays may also be going up under the 2016 health insurance plans.
Increases in health insurance costs are not new, but they often impact older, retired people more than younger ones. Some readers have commented that the CPI used for determining COLA increases for retirees is not accurate because it does not reflect the actual costs or spending habits of older Americans.
In fact, there is a basis for this concern. An index has been developed with different weighting for expenses, such as medical expenses, as elderly people spend more on health care than younger consumers. The index is called the Consumer Price Index–Elderly (CPI-E). The CPI-E has been under review by the Bureau of Labor Statistics for about three decades but it is still considered an experimental program.
Rep. Michael Honda (D-CA) has re-introduced H.R. 3351, the CPI-E Act of 2015, which would adopt a measure of inflation more tailored to the costs of older Americans but, with the massive national debt that is increasing by hundreds of billions each year, there will not be a rush in Congress to increase federal spending.
Under the regular consumer price index, medical care is not given as much weight as many other types of expenses. Retirees are more likely to be going to a doctor or a hospital than getting a college education, so the price index does not necessarily reflect your real expenses if you are retired.
As noted in a recent article by Michael Wald, “Individuals ages 65 and older allocate 13 percent of their spending toward health care costs compared to the 5 percent allocated by the general public. COLAs would be larger using the CPI-E and would more accurately reflect seniors’ real costs.” (See Could There Be a Higher Annuity in Your Future?)
There is also a chance that a number of federal retirees who are Medicare beneficiaries will be paying an inordinate amount for a premium increase that otherwise would be limited to a smaller number of beneficiaries than would normally help pay for an increase in expenses. Those who would pay the higher premiums include 2.8 million new beneficiaries, 1.6 million whose premiums aren’t deducted from their Social Security payments and 3.1 million people with higher incomes. In effect, this means that some federal retirees may get hit with higher premiums. As noted in a recent article, “Starting in January, most retirees under the Civil Service Retirement System (CSRS), who also are enrolled in Medicare Part B, will see a 52% jump in their monthly Medicare premiums due to rules that determine increases in monthly Social Security benefits and Part B premiums.” (See Medicare Part B Premiums Are Scheduled to Rise 52% in January) Legislation has been introduced in Congress to mitigate this increase but, as of this writing, it is not known if this legislation will pass.
The reality is that federal retirees and Social Security recipients, among others, will not be receiving a cost of living adjustment in 2016. Be sure to plan your budget accordingly as your actual expenses will still be going up.