It doesn't look good for federal retirees.
Federal and military retirees will find out next week whether they can expect a cost-of-living adjustment next year. It doesn’t look good.
The Bureau of Labor Statistics on Oct. 15 will publish the third number that determines whether retirees get a COLA in 2016. Things are bleak: Based on the current data, there won’t be a COLA boost next year. Things might change with September’s number, the final data point in the equation, but it’s not likely.
The Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) fell 0.2 percent in August, after staying flat in July. The CPI-W, upon which the annual COLA for all retirees is based, decreased 0.3 percent over the last 12 months to an average index of 233.366. The CPI-W measures price changes in food, housing, gas and other goods and services.
Why does that matter? Because it’s less than the average for the third quarter of 2014 (234.242), which is an important component in the COLA equation. The September 2015 numbers could bring up that 233.366 average, but it’s unlikely based on the trend.
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.
(Image via MrIncredible / Shutterstock.com)