You know that January cost of living adjustment many retirees were counting on to help pay higher 2011 health premiums?

Forget about it!

For the second straight year, federal and military retirees and people who get Social Security benefits will not be getting a COLA. The last inflation-catch-up the retirees got was a 5.8 percent increase in January, 2009.

Since that large 2009 COLA the economy has gone through period of minimal inflation and, in many months, deflation which the cost of living dropped. Fortunately for retirees benefits are not reduced or adjusted downward because of deflation.

But no COLA in 2010 and 2011 will put some retirees in the hole, especially if their preferred health plan raises premiums next year as many will or if their Medicare premiums go up.

Unlike federal pay raises, which are determined by Congress and the White House, increases for retirees are based on the rise in living costs from the current third quarter (July, August, September of 2010) over the third quarter of the previous year. Since the automatic inflation catch up system went into effect, retirees have grown accustomed to annual increases. But few people anticipated the impact of deflation, an actual drop in prices, on the retiree COLA.

White collar (nonpostal) federal workers are still on track to get a 1.4 percent pay raise in January unless Congress, at the last minute, decides to modify or block it.

The COLA is determined by the Bureau of Labor Statistics which uses the Consumer Price Index. With the September level yet to come, the CPI for July/August 2010 was 214.052 which is 0.7 percent LOWER than the third quarter (in this case 2008) which was 215.5. Whether your understand it, or believe it, those are the official numbers. So with one month (September) to go in the COLA countdown, get used to the idea of a second year without an inflation-triggered increase.

For an official explanation of how the COLA countdown operates, surf over to narfe.org, scroll down to Legislation and then clock on the COLA countdown.

FSA Downsizing

Earlier this week we reported that as of January 1, 2010 your pre-tax Flexible Spending Accounts will not cover most currently covered non-prescription over-the-counter drugs. To add insult to injury, beginning in 2013 the maximum FSA account you can have (now $5,000) will be reduced to $2,500.

The changes will bring added revenue into the Treasury but force feds to pay more for OTC drugs and a larger share of their health premium co-payments. The changes are part of the Affordable Care Act passed earlier this year.

The FSA changes prompted Patrick L., an IRS worker to ask the following:

• “…I rely on the FSA much more heavily to get a break on dependent care. Is there any change in that separate category of FSA?”

Benefits specialist Ed Zurndorfer says there will be no changes in FSA for dependent care so you can continue to establish an account of up to $5,000.

To reach me: mcausey@federalnewsradio.com

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