Tag Archives: COLAs

New Ways to Measure Future COLA’s?

measure

The 2018 Cost of Living Adjustment is set using the Bureau of Labor Statistics CPI-W index, however, there are other possibilities for making the adjustment in 2019 and beyond. The BLS has several measures of inflation. The CPI-W is one of the oldest for making COLA’s for federal retirees, Social Security recipients, and others.

The CPI-W measures goods and services purchased by hourly wage earning or clerical workers, which applies to a smaller and smaller percentage of the population. Congress has pushed for an alternative method of computing COLA’s. Below are a few options.

CPI-U

The BLS produces another major index called the Consumer Price Index for All Urban Consumers (CPI-U). This includes expenditures by urban wage earners and clerical workers, professional, managerial, and technical workers, self-employed, short-term workers, unemployed, retirees and others not in the labor force.

This index is most often cited when talks of inflation occur because it reflects a much larger share of the U.S. population than the CPI-W. The CPI-W and CPI-U closely followed each other for the 12 months ending in July. The CPI-U rose 1.7 percent, while the CPI-W rose 1.6 percent.

Moving to this index may be less controversial than others.

CPI-E

The BLS also produces a monthly index focused on the purchasing habits of the elderly (CPI-E). It tends to rise faster than the two mentioned above. It measures the average change in prices over time for a fixed market basket of goods and services for Americans age 62 or older.

The National Active and Retired Federal Employees Association (NARFE) has advocated for the use of the CPI-E. Richard Thissen, president of NARFE, said,

“The fact that we do not use the CPI-E already is shocking. Instead, COLA’s for seniors collecting Social Security and federal civilian or military retirement benefits are based on costs experienced by ‘urban wage earners and clerical workers’, not upon the costs retired individuals experience. And that does not make a lot of sense. Worse yet, it is costing seniors, including federal civilian and military retirees, precious dollars every year. The 2019 COLA was 0.3 percent, and the year before, there was no COLA at all. Yet, over these 2 years, the actual cost of living incurred by seniors increased by 2.7 percent—2.1 percent in 2016 and 0.6 percent in 2015. That is what seniors should have received and that is what this bill would provide them. For the average federal annuitant, that would have meant an increase of approximately $950 per year.”

Currently, the BLS says that the CPI-E has methodological limits which make it unreliable as a substitute for CPI-U or CPI-W. With more funding, the CPI-E could develop into a statistically reliable index.

C-CPI-U

A more controversial measure of inflation, known as the Chained CPI (C-CPI-U), is designed to mathematically “use expenditure data in adjacent time periods to reflect the effect of any substitution that consumers make across item categories in response to changes in relative prices. The new measure is designed to be a closer approximation of ‘cost of living’ index than existing BLS measures”, according to the BLS.

This index gets closer than other indexes by better reflecting how consumers react to changing prices. An example is if the price of pork increases while the price of chicken doesn’t, consumers may shift away from pork to chicken. The C-CPI-U accounts for this type of substitution between CPI item categories.

The BLS has determined that the C-CPI-U tends to show a lower inflation rate than other indexes. For this reason, NARFE has opposed using the C-CPI-U in calculating federal retiree COLA’s because lower COLA’s would reduce the long-term cost of providing federal retiree and Social Security benefits.

Elimination of the Automatic COLA

“Congress enacted the COLA provision as part of the 1972 Social Security Amendments, and automatic annual COLA’s began in 1975. Before that, benefits increased only when Congress enacted specific legislation,” according to the Social Security website.

Prior to automatic COLA’s, Social Security benefits were sporadic. Congress moved to an automatic formula because some saw Social Security increases as too generous and others argued they failed to keep up with inflation.

Losing an automatic COLA would mean retirees would have to go to Congress each year and compete for funding against other government programs.

Tagged , , , ,

New Calculation for the COLA?

cola

Legislation has been introduced, CPI-E Act of 2017, to change the COLA formula. Currently, the CPI-W (Consumer Price Index for Urban Wage Earners and Clerical Workers) is used, but this new bill would use the CPI-E (Consumer Price Index for the Elderly). This change would make this calculation more accurate because the way the COLA is measured now looks at how inflation has impacted a wage earner, not the impact inflation has had on goods and services seniors rely on. More people are working because of normal economic growth and wages are increasing faster than cost of living increases for the elderly.

The 2017 COLA is 0.3 percent. It is calculated based on the rise in CPI from the third quarter of the current year (July through September) over the third quarter of the previous year. Richard Thissen, the president of the National Active and Retired Federal Employee Association said that in the past two years, the actual cost of living for seniors has increased by 2.7 percent (2.1 percent in 2016 and 0.6 percent in 2015) and this should’ve been reflected in the COLA’s.

The Labor Department uses the CPI to measure inflation or deflation nationwide monthly. The CPI is the measure of inflation and tracks the prices of goods. Each item has a “weight” in proportion to its importance in consumers buying habits. For example, housing has a higher weight than travel. The current CPI uses items that are more consistent with younger people, not seniors, who the cost applies to.

The proposed changes would extend beyond retirement benefits from Social Security. This would create a new COLA for those on disability, survivor’s benefits, federal retirement plans, veterans, and VA compensation for dependents.

COLA’s for Military Veterans

Military veterans may also get an automatic COLA if recently introduced bills become law. The Veteran’s Compensation COLA Act of 2017 would provide a COLA beginning December 1, 2017. The COLA would apply to:

  • Wartime disability compensation
  • Compensation for dependents
  • Clothing allowance
  • Dependency and indemnity compensation to surviving spouses
  • Dependency and indemnity compensation to children paid to wounded warriors and their families for injuries they suffered while serving

To learn more about this possible new calculation, click below.

Is a New Way of Calculating the COLA Coming?

Tagged , , , ,

Difference Between COLA’s and Raises

raisesThere is often confusion between a Cost of Living Adjustment (COLA) and a pay raise. While they both provide an increase in payments, whether annuity or income, they are very different. So, what is a COLA and what is a pay raise?

COLA’s

Cost of Living Adjustments are effective December 1st and payable to retirees each January. They are a measure of inflation and are paid automatically. COLA’s are based on the change in the Consumer Price Index (CPI) from the third calendar quarter of the year that just ended to the third calendar quarter of the preceding year. The adjustment appears in the January payment on the first business day of the month.

FERS

If you retired under FERS, the COLA is not paid until age 62, unless you’re a disability retiree, receive survivor benefits, or retired under other special provisions. Also, if under FERS and have a CSRS component, that part is subject to the CSRS COLA. The calculation is trickier for FERS retirees.

COLA’s are prorated for those who retired during the calendar year before the COLA is paid, depending on how many months they were retired that year.

Raises

Raises are for active employees. They are linked to labor market conditions, not cost of living. Raises are determined during the annual Congressional budget cycle and they start with recommendations from the White House. Annual raises are paid regardless of whether the employee had worked the entire previous year.

There is a big difference between these two. COLA’s are not raises. If you, or someone you know, is facing an early retirement because you can no longer perform your job duties, call Harris Federal Law Firm now. We can help you through the process and explain how COLA’s will affect you. Give us a call at 877-227-2623 or fill out this inquiry form.

To learn more about how COLA’s affect CSRS retirees, click the link below.

What is the Difference between COLA’s and Pay Raises?

Tagged , , , ,