Retirees in the hole, COLA-wise

Each year, in January, more than 70 million people in the U.S. and two dozen other countries get a cost of living adjustment in their retirement benefits. The COLA is designed to keep pace with inflation and goes to retired federal workers, military retirees and persons who get Social Security benefits.

The retirees or their survivors get a COLA only if inflation goes up. There is no reduction in current benefits if living costs are flat or actually decrease. Which explains why the retirees won’t be getting a COLA this January. Sort of …

The actual process of understanding and explaining how the COLA program, which is so important to so many people, works is tough. So tough that only a handful of men and women — two Tibetan monks who have taken a vow of silence, three now retired congressional staffers believed to be in hiding, a handful of employees of the Bureau of Labor Statistics and two men in Alexandria, Virginia — understand how the COLA really works. The locals are Chris Farell and David B. Snell. Both work in retirement and policy for the National Active and Retired Federal Employees.

When it was announced last week that retirees won’t be getting a COLA this January, people have been asking why not? Gasoline prices may be down, but other stuff (including health insurance premiums) is going up. So what gives:

Reader David Curran supplied what he thought was the answer to the mystery of the COLA. And why it is that when there is a decrease the the cost of living benefits aren’t reduced. He put it this way:

“*Now that we officially know that there will be no COLA next year, there is a little aspect of this that is not common knowledge. When the calculation for the 2017 COLA begins next month, it will not begin at zero. Since the 2016 calculation finished at -0.5, that will be the starting point for the next cycle. So, before retirees can even begin to think about what the COLA might be a year from now, the CPI-W has to get out of the red to begin with. So, let’s say that there is relatively little inflation of 0.5 percent in the next year. Not out of the question considering how things have gone recently. Well, in that case, the 2017 COLA would be a big fat zero — the -0.5 we are starting with plus the 0.5 increase in the CPI. This is the reason why benefits do not go down if there is negative inflation. That decrease is eventually made up for by including the negative in any future calculation. The bottom line here is that in order to have any COLA increase in 2017 the CPI-W has to increase more than 0.5 percent in the next year. Fair or not, that’s the system.”

It sounded right, but we decided to run it past the experts. Since I am not allowed to make long distance calls to Tibet, second best was the two Alexandria experts, David and Chris. They work for the National Active and Retired Federal Employees. David said Curran’s explanation looked good, but he passed it on to Chris.

Explaining the COLA process and the CPI-W calculations isn’t easy, but this is what Chris said:

“Just like when this happened before, the reference number to keep in mind is the 2014 third quarter ( July, August, September) average base index, 234.242. Only when a subsequent third quarter average index exceeds 234.242 will there be a cost of living adjustment in the three federally administered retirement programs — Social Security, military retired pay and federal civil service benefits.”

Bottom line, retirees are in the hole, CPI-wise, by 0.5 percent. That means inflation has a lot of growing to do during the third quarter of 2016 before there can be a January, 2017 COLA.

Nearly Useless Factoid

By Michael O’Connell

Geoffrey Holder, the actor, dancer and director who famously starred in 7UP’s “Uncola” television commercials in the 1970s and 1980s, won two Tonys as costume designer and director for the 1975 Broadway production of “The Wiz”.

Source: Ad Age

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