Federal retirees are waiting to find out what their cost-of-living adjustment will be next year.
The government shutdown has delayed the announcement of the 2014 COLA figure, which the government typically publishes in mid-October. The annual COLAs are based on the percentage increase (if any) in the average Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) for the third quarter of the current year over the average for the third quarter of the last year in which a COLA became effective. The CPI-W measures price changes in food, housing, gas and other goods and services.
The 2014 COLA, which also affects Social Security beneficiaries and those receiving veterans’ benefits, is likely to be around 1.5 percent, based on an Associated Press analysis. If that’s accurate, it will be the smallest increase in years. AP estimated the increase would amount to about $17 per month.
The average of the July, August and September consumer price numbers, along with the average figure from the third quarter of 2012 are used to calculate the 2014 COLA. The Bureau of Labor Statistics hasn’t released September’s inflation figure yet, which is the final data point needed to calculate the 2014 COLA. This year's increase takes effect on Dec. 1 and will be reflected in retirees’ first annuity payments in January 2014.
The salaries of federal employees are not affected by the COLA announcement.
While retirees will get an increase, it will be smaller than the 2013 COLA. If, for the sake of argument, the 2014 COLA turns out to be 1.5 percent, that means federal retirees -- whether they are covered by the Civil Service Retirement System or the Federal Employees Retirement System -- will receive the full 1.5 percent. According to the formula, if the full COLA increase is 3 percent or higher, as it was for 2012, then FERS retirees receive 1 percent less than the full increase. So FERS retirees received a 2.6 percent bump for 2012. If the COLA falls between 2 percent and 3 percent, then FERS retirees would receive 2 percent. If the increase is less than 2 percent, as it likely will be in 2014, FERS retirees receive the same as CSRS retirees. In other words, 1.5 percent-ish all-around. Check out this explanation from the Social Security Administration on how COLAs are calculated. For a history of COLAs and federal employee pay raises going back to 1970, review this Retirement Planning column from Tammy Flanagan, the senior benefits director for the National Institute of Transition Planning Inc.
Lawmakers and the Obama administration have considered switching to a less generous formula for determining COLAs for federal retirees and Social Security beneficiaries. The proposed change to what’s known as the “chained CPI” has surfaced during several deficit reduction talks over the past few years. 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.
Advocates for federal and military retirees argue that the current index and the chained CPI do not account for how much seniors spend on health care. And they say switching to the chained CPI would increase taxes on lower- and middle-income taxpayers and adversely affect job growth across the country.