Rapid increases in the Consumer Price Index in 2008 pushed the annual COLA increase for 2009 up to 5.8 percent, well above the 2.3 percent increase of 2008. The results for 2010 won't be as strong because of the recession, but feds shouldn't panic.
The projections look grim. In April, the Congressional Budget Office announced that an overall decline in the cost of living meant that it was not projecting an increase in the COLA for Social Security recipients for 2010 or 2011, and that the economy was unlikely to recover enough to produce a COLA boost in 2012 either. Social Security and federal retiree COLAs are calculated the same way. CBO forecasted that the economy would bounce back sufficiently to yield a 0.8 percent increase by 2013.
But a small, or nonexistent, COLA might actually be a good thing for federal retirees in this economy since Congress has targeted cost-of-living adjustments as a way to save money during past financial difficulties.
Congress passed the Gramm-Rudman-Hollings Act in 1985, which required the president to cut spending across government by a uniform percentage if the federal deficit rose above a certain level. In 1986, that legislation went into effect when President Reagan canceled the 3.1 percent COLA scheduled for federal civilian and military retirees that year.
Subsequently, Congress passed legislation to exempt cost-of-living increases from those mandatory cuts, but that didn't end efforts to target COLAs as part of the budget process. In an effort to reduce the budget, President Clinton convinced Congress to delay the start date of cost-of-living adjustment payouts to federal retirees, so COLAs took effect in April instead of January from 1994 to 1996.
COLAs could have been a tempting target this year. President Obama said in his budget that he was proposing a 2 percent pay increase for current federal employees as a belt-tightening measure, and the cost of extending benefits for federal employees became a factor in the debate over the House's passage of the 2009 Federal Employees Paid Parental Leave Act last week. The National Active and Retired Federal Employees Association in 2008 said it would monitor Congress closely for any efforts to target retiree benefits as a way to close gaps in the budget.
But there may not be an automatic increase for Congress to target at all in the fiscal 2010 budget process. Feds can take some consolation in one fact: their annual cost-of-living adjustments are not allowed to be negative. So even if the Consumer Price Index falls, the government cannot reduce COLA payments to federal retirees. So even in a bad economy, it's possible to come out a little bit ahead.