GAO Weighs in on Annual COLA Calculations

June 19, 2020 6:51 AM
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In October of every year, the annual cost of living adjustment (COLA) for the coming January is announced. In 2020, the COLA went up 1.6 percent for Civil Service Retirement System (CSRS) annuities, Federal Employees Retirement System (FERS) annuities, and Social Security benefits in January 2020.

GAO Looking at COLA Data

At the moment, it appears likely that the COLA for 2021 may turn out to be zero. In other words, while the figures will not be in until this Fall, there may turn out not to be a COLA increase in January 2021.

The Government Accountability Office (GAO) is now taking a look at the situation. Here is what is going on.

The amount of any COLA in the coming year is based on a consumer price index as calculated by the Bureau of Labor Statistics.

For those who have been staying home a lot more, it may seem as though the price of groceries has increased. And, in fact, grocery prices have gone up. Meat, poultry, fish, baked goods, beverages, and dairy products have gotten more expensive. Fruits and vegetables are up as well. In April, grocery prices increased the most in about 50 years.

Why Wouldn’t There be a COLA in 2021?

If groceries are going up in price, why would there not be a COLA in 2021?

The answer may turn out to be fuel prices. The cost of energy, such as gasoline, dropped dramatically this year. This is, no doubt, in part because people were staying at home and not driving very far. With many or most businesses closed, driving a car was not as necessary and demand plummeted.

The result is that expenses for many retirees are going up but their retirement income is not going up, or at least not keeping up with inflation as prices for goods and services used by more retirees have increased.

GAO’s Analysis of the COLA Situation

GAO now says the Bureau of Labor Statistics (BLS), the agency that produces the consumer price indexes, has not evaluated whether its data accurately reflect what groups of people pay, where they shop, and what they purchase.

According to GAO, BLS needs to evaluate the data they use, as well as explore using other data, to improve its indexes.

Any changes in the CPI indexes used could impact Social Security recipients and federal retirees. According to GAO, the “BLS faces accuracy, timeliness, and relevancy challenges developing consumer price indexes (CPI) for subpopulations of blue-collar workers and older Americans. For example, the CPI for these workers is used to adjust federal retirement benefits for inflation, including Social Security.”

GAO writes that the Secretary of Labor should ensure BLS evaluates the data sources now used to produce subpopulation indexes. These methods could include engaging more directly with people who are impacted by the CPI data or seeking input from its advisory groups and other knowledgeable entities about approaches to expand data collection in a cost-efficient manner.

“Without an evaluation, federal retirement benefits could be subject to adjustment based on potentially inaccurate information,” stated GAO.

Is CPI-W Index Accurate for COLAs?

Here is what the GAO means about potentially inaccurate information.

The CPI-W index is used to determine whether and in what amount the COLA will be for the coming year. The CPI-W is the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W).

GAO has determined “the relative sample size used to calculate the expenditure weights for the CPI-W subpopulation has been shrinking in part because of declining response rates and demographic shifts away from the occupations included….”

The accuracy of the weighting used in the CPI-W “may be deteriorating” and BLS has not evaluated the accuracy of the data used in compiling the index since 1980.

Summary

Changing the calculations for determining the annual COLA for millions of retirees benefiting from this process is complex and could prove to be expensive. As the federal government is already drowning in debt and running trillion-dollar deficits, adding to federal expenditures in a significant way will create problems and political conflict.

GAO has highlighted a situation many readers are already experiencing. Namely, the annual inflation for products and services used by elderly Americans is going up faster than the annual COLA for the coming year.

BLS agreed with the GAO recommendation to “explore cost-efficient ways to evaluate the data currently used to produce subpopulation indexes….”

BLS did not agree with the recommendation to “explore the use of National Accounts data to produce more accurate, timely, and relevant CPIs.”

It is possible that the GAO recommendations will contribute to instituting a CPI-E index for COLA calculations for elderly Americans. The “elderly index” would theoretically measure more accurately the expenses incurred by retirees.

The index, however, has not been implemented. It was created in 1988 but is considered by BLS to be experimental only and not used by the government to adjust retirement benefits.

TSP and Federal Retirement

Federal employees, particularly those under the FERS system, may have an advantage over many Americans if they have contributed to their Thrift Savings Plan (TSP) account during their federal career and if they have invested in the TSP stock funds. While the G Fund often lags the inflation rate but is considered the safest of the TSP funds, many of the TSP stock funds have kept pace with inflation or exceeded the inflation rate in some years.

So, while the defined benefit portion of federal retirement and the Social Security portion of a retirement plan may lag inflation, the TSP will provide a chance to keep up with increasing expenses.

Any action in implementing the CPI-E index is unlikely to occur in the near future. The GAO report will provide an argument for organizations that want to see such an index implemented. That would require legislation from Congress.

© 2020 Ralph R. Smith. All rights reserved. This article may not be reproduced without express written consent from Ralph R. Smith.

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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

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