If you are a retiree who was upset when you didn’t get an annual cost-of-living adjustment in 2010, I can imagine how you feel now that you’ve learned that you won’t get one in 2011, either. Neither will Social Security beneficiaries.
Actually, I don’t have to imagine because I’m in the same boat. I’m a federal retiree, and I’m also receiving Social Security benefits. The only reason I’m not writing angry letters to my members of Congress is because I understand both the law and the process used to implement it. Let me share that information with you and see if it helps.
By law, the Bureau of Labor Statistics is charged with the responsibility of determining how much the annual cost-of-living adjustment will be. It does this by measuring the cost of living during July, August and September of the current year against the same months in the previous year. The percentage difference between the two determines the amount of the COLA.
Getting the data for the comparison is a multistep process. First, BLS goes around the country gathering information from professionals, urban wage earners, clerical employees, the self-employed, the poor, the unemployed and retirees. The product of that data is the Consumer Price Index for Urban Consumers (CPI-U), which covers approximately 87 percent of the population.
Because the CPI-U includes both workers and nonworkers, BLS draws a subset of that data on urban wage earners and clerical workers (CPI-W) to more closely match the spending patterns of federal beneficiaries.
To learn about month-to-month changes in spending patterns, BLS gets detailed information from families and individuals about what they bought in more than 200 categories. This “market basket” of information is sorted into eight major groups: food and beverage; housing; apparel; transportation; medical care; recreation; education and communication; and other goods and services. Also included are a variety of user fees, such as water and sewerage charges, auto registration fees, vehicle tolls, and sales and excise taxes.
BLS doesn’t get information on income and Social Security taxes because they aren’t directly associated with consumer goods and services. For the same reason, investment items such as stocks, bonds, real estate and life insurance are excluded.
To validate what it learns about consumer spending patterns, BLS also gathers price information on thousands of items from retail stores, service establishments, rental units and doctors’ offices.
All this data collection and computation boils down to the COLA that retirees and Social Security beneficiaries will be entitled to in December of each year and receive in their January annuity checks and, where applicable, Social Security benefit payments.
With the exception of this year and next, COLAs have been pretty good. From 2000 to 2009, they’ve ranged from a low in 2003 of 1.4 percent to a high in 2009 of 5.8 percent for Civil Service Retirement System retirees and 4.8 percent for Federal Employees Retirement System employees. If the CPI-W increases by 3 percent or more, eligible FERS retirees receive the CPI-W minus one percentage point. Note: With the exception of special category employees, disability retirees and survivors, FERS retirees aren’t eligible for COLAs until they reach age 62.
So, is there any good news? Yes, there is. The law doesn’t permit any reduction in federal annuities or Social Security benefits if the result of the COLA computation is negative. Further, if you are receiving a Social Security benefit and enrolled in Medicare Part B, the hold-harmless provision in that law means that those premiums won’t increase for the second year in a row.
On the other hand, if you aren’t receiving a Social Security benefit and are enrolled in Medicare Part B, your premiums will go up, just like they did last year. Sorry about that.