Chained to the Fiscal Cliff?

Retirees should brace themselves for the strong possibility that a less generous COLA formula is part of deficit reduction.

Here we are again, back in that old, familiar Washington place known as Down to the Wire.

With 19 days left until the end of the year, and even less time for cutting a deal on the fiscal cliff, President Obama and Republican House Speaker John Boehner reportedly are in their second round of the deficit reduction offer-counteroffer game.

The Republican and Democratic proposals aren’t long on specifics but both sides seem to be drawing on ideas they (and others) have floated before. Boehner’s opening parry after the White House released its first “offer,” included reducing federal pay and benefits as a way to help shrink the deficit. His second counteroffer reportedly is similar to the first one. (Second verse, same as the first.) Specifically, Republicans have called for extending the federal pay freeze, decreasing the government workforce by 10 percent through attrition and requiring feds to contribute more to their pensions. The pension proposal also is something Obama supports, although the contribution amounts from feds would be smaller under the administration’s plan.

Still, it’s looking more like any deal made before the New Year will be broad, and quite likely, short-term. In other words, there probably won’t be specific proposals reducing federal compensation included in the plan. Federal employees could dodge a bullet between now, and whenever Congress and the administration can agree on a mutually satisfactory long-term deficit reduction plan.

But civilian and military retirees would take a hit if both sides agree on a proposal to switch to what’s known as the “chained CPI” formula to determine cost-of-living adjustments for federal retirees and Social Security beneficiaries. The chained Consumer Price Index is viewed as a more accurate measure of how people substitute one item for another in the face of a price increase. The result would be lower COLAs over time. 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.

Republicans are floating the chained CPI proposal as part of their fiscal cliff deal; 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, Rivlin-Domenici, and other double-barreled deficit duos.

This is how a 2010 memo from the nonpartisan Congressional Budget Office explains it: “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.

Christmas Eve

It’s no secret feds are waiting to hear whether Obama grants them time off on Dec. 24. It certainly would a bright spot in an otherwise Dickensian Christmas in Washington this year. There’s still no word yet, but this being America and all, there is a public petition on the White House’s We the People website calling for the holiday. Click here for our recent story on it.

The petition, created Dec. 1, already has 18,242 signatures and is growing by the hour -- maybe even minute. If it crosses the 25,000 signature threshold before Jan. 1 (highly likely), then the White House will issue a response. The White House’s average response time on petitions, though, is more than a month now. By then, Christmas Eve 2012 will be a distant memory.

There is reason for hope this year, since Christmas falls on a Tuesday. The past two times that happened -- in 2001 and 2007 -- President George W. Bush gave federal employees Christmas Eve off, creating a four-day weekend. I’m willing to bet, however, that most feds would be more than happy to settle for a fiscal cliff deal that doesn’t touch their pay and benefits in exchange for the holiday.