The cost of living adjustment (COLA) for many federal retirees and Social Security recipients did not go up in 2016. (See Your COLA Increase in 2016 Will Be: Zero)
The news for 2017 is a little better but, overall, federal retirees will still see their overall income go down. The COLA increase for 2017 will be 0.3%.
Low COLA and Rising Insurance Costs Will Hit Federal Retirees
This will be the smallest increase on record with the exception of the several years without any COLA increase. The COLA increase was 1.7% in 2015, 1.5% in 2014 and 1.7% in 2013. There were no COLA increases in 2016, 2011 or 2010.
With an average increase of 6.2% in premiums for health insurance under the Federal Employees Health Insurance Program (FEHB), the 0.3% COLA will not provide an increase in income for many retirees.
A significant increase in long term care insurance costs averaging about 83% has also been announced and will impact many federal retirees.
Retiree expenses may be different than for current federal employees. The Bureau of Labor Statistics notes in comments on the Consumer Price Index that “the CPI does not produce official estimates for the rate of inflation experienced by subgroups of the population, such as the elderly….”
Medicare Premiums Set to Rise
Unfortunately, the financial pressure will also continue with an increase in Part B premiums for Medicare. Medicare premiums could rise by as much as 23% for about 30% of beneficiaries. (See Groups Urge Lawmakers to Combat Rising Medicare Part B Premiums)
Under the hold harmless provision of the Social Security Act, the dollar increase in Medicare Part B premiums is limited to the dollar increase in an individual’s Social Security benefit. With the low COLA for Social Security benefits, about 70 percent of beneficiaries will be held harmless. This means their Medicare Part B premiums will increase only in proportion to the increase in their Social Security checks.
The Bipartisan Budget Act of 2015 allowed the Medicare Part B monthly standard premium to increase by 16 percent for those whose premiums were not deducted from Social Security benefits. While the law prevents raising premiums on most Medicare beneficiaries, premiums for about 30 percent of Medicare Part B enrollees may go higher to offset increased costs.
The practical effect is federal retirees covered by the Civil Service Retirement System (CSRS) and who do not receive Social Security benefits will pay more for Medicare. Congress could pass new legislation to prevent this from occurring and may (or may not) do so this year.
Reaction of Employee Organizations
According to the National Active and Retired Federal Employees Association (NARFE):
Not only is the COLA increase unrealistically low and not reflective of the expenses faced by seniors, hundreds of thousands of federal retirees enrolled in Medicare will see a significant decrease in their annuities for the second straight year, due to the so-called ‘hold harmless’ provision of Social Security law.
The American Federation of Government Employees (AFGE) is voicing similar concerns. In a press release, the union writes:
Prices for many items that seniors must purchase are rising faster than the overall inflation rate. Forcing this group of retirees to shoulder such a huge cost burden will have a devastating impact on their already modest living standards.
In short, the financial status of many federal retirees is going to deteriorate in 2017. The only question is the extent of their decrease in purchasing power. Hopefully, those that are the most directly impacted have enjoyed increases in the Thrift Savings Plan (TSP) investments for extra income.
The lesson in this for new federal employees or those with many years before retirement: Invest as much as you can in the Thrift Savings Plan. You may need this money when you leave federal service. With a federal debt of about $20 trillion that is continuing to go up by hundreds of billions each year, do not anticipate a big increase in federal employee retirement benefits.
Raise for Current Federal Employees
The COLA increase for 2017 will not directly impact current federal employees. There is often confusion about the term “COLA” as many federal employees assume the term applies to their annual pay raise.
While we do not know what the pay raise will be for the federal workforce in 2017, a reasonable assumption is that there will be an average increase of 1.6% in January. (See 2017 Federal Pay Raise and COLA Update)