Fed groups blast possible fiscal cliff switch to less generous COLA formula

Haraz N. Ghanbari/AP

Advocates for federal employees and retirees urged lawmakers Monday to oppose a switch to a less generous formula for determining cost-of-living adjustments as part of a fiscal cliff deal.

Moving to the chained CPI would be “unfair” and “reduce significantly earned retirement benefits,” according to a Dec. 17 letter from the National Active and Retired Federal Employees Association to members of Congress. President Obama and House Speaker John Boehner, R-Ohio, both reportedly have offered proposals that include switching from the current formula to what’s known as the chained CPI to calculate annual cost-of-living adjustments for federal retirees and Social Security recipients.

The result would be lower COLAs for retirees, including federal and military retirees, over time. The change also would affect veterans’ benefits and disability insurance benefits.

It’s highly likely that any final deal Obama and Boehner agree on will include a switch to the chained CPI.

COLAs currently are determined using a formula that takes into account increases in the Consumer Price Index for Urban Wage Earners and Clerical Workers, but some experts argue that a chained CPI, which takes into account modifications in purchasing habits as prices change, provides a clearer understanding of inflation.

NARFE criticized that assessment. “Both the current index and the chained CPI fail to accurately reflect the costs most seniors face,” the letter stated. “Notably, they do not account for how much seniors spend on health care, the cost of which continues to outpace inflation of other consumer goods.” The group also said using the chained CPI would increase taxes on lower- and middle-income taxpayers. “The average 65-year-old retiree, receiving about $15,000 in Social Security benefits after earning an average income of about $43,000, would need to have saved an additional $28,000 to account for the lost future income,” NARFE stated.

The American Federation of Government Employees also called on lawmakers to reject a move to the chained CPI. “President Obama could not have picked a worse or more regressive item in the House Republican budget than the chained CPI,” AFGE President J. David Cox said in a statement. During the past few years, Obama reportedly has expressed support for switching to a chained CPI, at least in private deficit reduction talks. It also was considered by the joint congressional committee on deficit reduction and endorsed by Simpson-Bowles.

This is how a 2010 memo from the nonpartisan Congressional Budget Office explains the formula: “The chained CPI grows more slowly than the traditional CPI does: by an average of 0.3 percentage points per year over the past decade. As a result, using that measure to index benefit programs and tax provisions would reduce federal spending (especially on Social Security and federal pensions) and increase revenues.”

And this is how a February article from the Center on Budget and Policy Priorities puts the issue into context: “Many of the federal government's retirement, disability and income-support programs -- including Social Security, federal civilian and military retirement, railroad retirement, [Supplemental Security Income], and veterans' compensation and pensions -- pay annual COLAs that are linked to the CPI.” The line was included under a subheading that read “Using Chained CPI Would Affect a Number of Programs and Save Significant Amounts.”

None of this is welcome news to retirees who already aren’t receiving an overly generous COLA in 2013. Federal retirees will receive a 1.7 percent cost-of-living adjustment in 2013, according to figures the Bureau of Labor Statistics released in October. And the COLA amount that recipients actually end up with is affected by Medicare Part B premiums, since those premiums are deducted from Social Security payments. The Centers for Medicare and Medicaid Services announced in November that the 2013 monthly premiums would increase 5 percent, so most retirees will end up with less than the 1.7 percent COLA.

Obama reportedly is trying to exclude disability benefits under Social Security’s Supplemental Security Income from the proposed switch to a chained CPI, as well as provide an increase in benefits to retirees who reach the age of 85, according to The Washington Post.

There has been more movement toward a fiscal cliff deal during the past few days as the calendar nears the New Year’s deadline. Nevertheless, the two sides remain fairly far apart on crafting a deal that contains a combination of mutually satisfactory tax revenue increases and spending cuts. Boehner said during a Tuesday morning press conference that the GOP was putting together legislation for a short-term deal to avoid some of the expiring tax cuts; he said he hoped to bring it to the floor by the end of this week. “At the same time, we are going to continue to talk to the president, we are also moving to Plan B,” the speaker said.

It’s not clear whether the Plan B Republicans eventually come up with would include provisions to avoid sequestration, the automatic governmentwide spending cuts scheduled to start on Jan. 2, 2013. Boehner said during the press conference, however, that the bill he wants to bring to the floor this week will not deal with the sequester.

The White House defended its proposal as balanced and reasonable, shortly after Boehner’s press conference. “The speaker’s ‘Plan B’ approach doesn’t meet this test because it can’t pass the Senate, and therefore will not protect middle-class families, and does little to address our fiscal challenges with zero spending cuts,” said White House spokesman Jay Carney. “The president is hopeful that both sides can work out remaining differences and reach a solution so we don’t miss the opportunity in front of us today.”

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