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Outlook for a COLA Increase in 2016 Still Isn't Great

So far the cost of living isn’t rising enough to warrant an increase, but that could change in the next three months.

The Bureau of Labor Statistics on Friday released another data point that provides a glimpse into the potential cost-of-living increase for federal retirees in 2016, and it doesn’t bode well.

The Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) rose 0.4 percent for the month of June, BLS reported. But the index decreased 0.4 percent over the last 12 months to a level of 233.804.

That is important because it is less than the average for the third quarter of 2014 (234.242), which is a key component in the COLA equation. The July, August and September 2015 numbers could bring up the 233.804 average, but it’s too soon to tell. The figure does seem to be creeping in the right direction, since it was 232.908 at the end of May. The exact cost-of-living adjustment for next year won’t be known until October when all the numbers are in.

The average of the July, August and September 2015 consumer price numbers, along with the average figure from the third quarter of 2014, is used to calculate the 2016 COLA. The annual COLAs are based on the percentage increase (if any) in the average 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. In this case, that is 2015 and 2014.

If there’s no percentage increase, there’s no COLA.

Retirees received a 1.7 percent COLA increase for 2015, a 1.5 percent boost for 2014, a 1.7 percent increase for 2013 and a 3.6 percent bump for 2012. The 2012 COLA increase was the first since October 2008 (which took effect in 2009).

According to the formula, if there is an increase, here’s how it plays out:

If the full COLA increase is 3 percent or higher, as it was for 2012, then retirees under the Federal Employees Retirement System receive 1 percentage point 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 is in 2015, FERS retirees receive the same as retirees under the Civil Service Retirement System.

Employees still working for the federal government do not receive a COLA, but they may end up doing better than retirees. Federal workers at the moment are on track to receive a 1.3 percent pay raise in 2016. 

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.

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