Retirement Planning Retirement PlanningRetirement Planning
Advice on how to prepare for life after government.

COLA Crunch

I will admit some of the recently released numbers regarding Social Security benefits have got even me confused. It's not just that there's no increase in the cost-of-living adjustment for the second year in a row -- which also, of course, affects government retirement benefits, such as annuities under the Civil Service Retirement System and Federal Employees Retirement System, along with military retirement benefits. There's also a dip in the formula for computing the benefits of people who turn 62 in 2011. Let's look at each of these issues in turn.


Listening to Americans being interviewed after the announcement last week that there will be no adjustment in Social Security benefits, it appeared that some people were blaming politicians for causing this to happen. But COLAs are determined according to a formula set out in federal law and are not adjusted annually by Congress.

The original law that provided a Social Security COLA was enacted in 1973. After some changes in 1983, COLAs have been based on increases in the Consumer Price Index for Urban Wage Earners and Clerical Workers (known as the CPI-W), as measured by the Bureau of Labor Statistics. So if you're looking to place blame, it should be on the economy and the prices of goods and services.

Which goods and services are included in the CPI-W? It's interesting to note that the cost of purchasing a house is not included, only the cost of rent, heating oil and furniture. The price of insurance is not included, but the cost of medical care is. It was among the items that have increased the most recently. Other major items included are food and beverages, apparel, recreation, education, and personal items such as tobacco and haircuts.

If you wondered why there was such a high COLA in 2008 (5.8 percent) and then none at all for the next two years, you can blame that on the price of fuel. The average price of a gallon of gas was more than $4 per gallon in 2008, then dropped to a low just under $2 in 2009. (The average price in September was $2.75.)

The purpose of granting a COLA is to enable retirees to purchase the same goods and services after they retire as they were able to do in the year of their retirement. To offset the nonexistent COLA for this year, members of Congress have floated a proposal to provide all Social Security recipients with a one-time $250 payment. The National Active and Retired Federal Employees Association is urging elected representatives to include federal, state and local government retirees who are not eligible for Social Security in any legislation offering a $250 payment to seniors.

Public vs. Private

It's important to note COLAs are rare in private sector pensions. Of course, anyone who receives a pension from a private company also will get Social Security, and receive its annual COLA. Federal employees under CSRS, who have spent their working careers exempt from Social Security, can get cost of living adjustments only through increases to their government pensions. CSRS retirees receive immediate full COLAs, like Social Security recipients.

Of course, many private companies no longer offer their employees pensions. Most now feature only a defined contribution benefit, such as a 401(k) plan. These savings plans also do not offer COLAs, putting the responsibility for providing a retirement nest egg on the employee. FERS employees have Social Security coverage, a defined benefit plan (the FERS Basic Annuity Benefit) and a defined contribution plan (the Thrift Savings Plan). The FERS defined benefit plan includes a modified COLA. (It's not increasing in 2011, either.) Here's more information on COLAs under CSRS and FERS.

Bending the Cost Curve

In addition to the issue of next year's COLA, there's another quirk in Social Security looming. According to the Social Security Administration, benefits for a person who will turn 62 in 2011 will be lower than those for someone with a similar wage history who turned 62 in 2010.

Ordinarily, you'd expect that someone who becomes eligible for Social Security next year would receive a higher benefit than someone who turned 62 this year if they had the same earnings history. But because of the drop in the wage index that is used to compute benefits, this is not true. To account for this dip, I need to explain a little more about the formula used to compute Social Security benefits.

The formula is based on "bend points," which determine how much of your monthly benefit is computed at 90 percent, 32 percent and 15 percent of your average lifetime monthly wage. These staggered percentages ensure that employees who worked a career at higher wages will get a lower replacement of wages from Social Security than those who worked their career at average or lower wages.

Now, for the first time in history, the amount computed at the 90 percent level is less for someone who turns 62 in 2011 than it was for someone who turned 62 in 2010. The maximum benefit amount computed at the 90 percent level for 2010 was $684.90 per month. The maximum benefit at the same level for 2011 is $677.70 a month. The amount computed at 32 percent also dropped, from $3,825 a month to $3,789 a month.

I'm not an expert in the intricacies of Social Security, but it seems to me that even though Congress hasn't acted to trim benefits, the country's economic problems are having the effect of lowering them and slowing the depletion of the Social Security trust fund.

For more retirement planning help, tune in to "For Your Benefit," presented by the National Institute of Transition Planning Inc. live on Monday mornings at 10 a.m. ET on or on WFED AM 1500 in the Washington metro area.

Upcoming programs will feature guests discussing health insurance open season this fall:

  • Nov. 1: Walt Francis, Checkbook's Guide to Health Plans for Federal Employees
  • Nov. 8: Jane Overton, GEHA Federal Health Plan (Fee-for-service plan and HDHP)
  • Nov. 15: John Patrick, Kaiser Federal Health Plan (HMO)
  • Nov 22: Tom Bernatavitz, Aetna Federal Health Plan (HMO/consumer-driven plan and HDHP)

Tammy Flanagan has spent 30 years helping federal employees take charge of their retirement by understanding their benefits. She runs her own consulting business at and provides individual counseling as well as online training for the National Active and Retired Federal Employees Association, Plan Your Federal Retirement as well as the Federal Long Term Care insurance Program. She also serves as the senior benefits director for the National Institute of Transition Planning Inc., which conducts federal retirement planning workshops and seminars.

For more retirement planning help, tune in to "For Your Benefit," presented by the National Institute of Transition Planning Inc. live on Federal News Radio on Mondays at 10 a.m. ET on WFED AM 1500 in the Washington-metro area. Archived shows are available on

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