A writer at FedSmith.com recently reported that, based on preliminary indications, those who receive federal disability retirement benefits likely will not get a cost-of-living adjustment, or COLA, next year.
In the article, FedSmith.com writer Ralph Smith does an excellent job of explaining how COLA is determined and how it is applied to those who receive disability retirement benefits or other benefits through the Civil Service Retirement System (CSRS) or Federal Employees Retirement System (FERS).
However, a question many disability retirees may have is, “Why should I care about a COLA increase?” We found a good explanation by turning to the AARP (formerly known as the American Association of Retired Persons).
COLA Increases Help Retirees to Maintain Buying Power
As the AARP’s National Institute on Retirement Security describes in its “pension education toolkit,” a COLA increase is important because it helps you, as a retiree, to hold on to your buying power in the face of rising inflation.
COLA basically reflects inflation, or the higher prices you pay for your housing, transportation, food, clothes, entertainment, medical care and other goods and services.
Because inflation tends to rise every year, a COLA increase can be vital to maintaining the standard of living you enjoyed at the time of your retirement. Even modest rises in inflation can have a major impact in the long run.
The AARP provides an example: A woman retires at age 62 with a monthly retirement benefit of $2,000. If inflation increases at a rate of just 3 percent per year, her buying power will drop by 22 percent within eight years if there is no COLA. Instead of having $2,000 worth of buying power, it will be as if she has only $1,567.
When she reaches age 85 – if there is no COLA increase – the same woman’s buying power would plummet by more than half of its original value to $993.
So, as you can see, COLA can play a major role in how you enjoy your retirement years.
How Are COLA Increases Determined?
As FedSmith.com reports, COLA increases for retirees such as those receiving federal disability retirement benefits are determined by an established formula.
The COLA determination reflects the Consumer Price Index for Urban Wage Earners and Clerical Workers. The U.S. Bureau of Labor Statistics calculates this index, which is also called the CPI-W. As FedSmith.com describes:
“[A] COLA effective for December of the current year is equal to the percentage increases (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.”
Any increase is rounded to the nearest 1/10 percent. If the rounded increase comes out to zero, or if there is no increase at all, there is no COLA.
How the COLA is determined depends on whether your receive CSRS or FERS benefits. Different formulas are used for each one.
For example, if you receive FERS benefits, your COLA increase will be:
- Equal to the CPI-W increase if that increase is 2 percent or less
- 2 percent if the CPI-W increase is more than 2 percent but less than 3 percent
- 1 percent less than the CPI-W increase if the increase is more than 3 percent.
Because “the index still shows a negative figure for next year’s COLA,” there will be no COLA increase in 2016, even though that “could change” before the final determination is made in October, FedSmith.com reports.
Based on a report by the Washington Post, if nothing changes, it would end a four-year streak in which federal retirees received a COLA increase, including a 1.7 percent bump in 2015 and 1.5 percent spike in 2014.
Hopefully, it will be a different story when October comes around, and there will be a COLA increase. If not, those receiving federal disability retirements would serve themselves well by taking a close look at their finances and possibly readjusting some of their spending habits to account for the slight drop in buying power in 2016.