Would you rather have your income indexed to inflation or subject to the pressures (up and down) of the marketplace?
The correct answer: It depends!
For example: Military retirees and most federal civilian retirees, as well as people getting Social Security benefits, are in line for at least a 2.1 percent cost-of-living adjustment in January. The amount of the COLA will be higher if the consumer price index rises in August and September.
The percentage increase in pay next year for federal civilian workers and active military personnel will be about twice as much as the federal retirees' COLA.
But in a year with higher inflation, higher unemployment or both, the situation might well be reversed.
Civil service retirement benefits go to 2.3 million people nationwide, including about 300,000 former employees or their surviving spouses in the Washington area. About one in six Americans gets a Social Security benefit.
COLAs for federal retirees are based on increases in CPI from the third quarter (July, August and September) of one year to the third quarter of the next. The amount of the next COLA is announced in mid-October, and the raises are cranked into checks in time for January delivery.
Most federal retirees, who are under the Civil Service Retirement System, will get the full amount of the COLA. CSRS benefits go to about 1.6 million retirees, according to the National Association of Retired Federal Employees. About 600,000 survivors also get benefits under the CSRS system.
About 77,647 retirees and 5,500 survivors are under the newer Federal Employees Retirement System. FERS has a diet-COLA feature, and as of now, the FERS increase stands at 2 percent. The amount could go up if the CPI increases this month and next.
Some retirees--who switched retirement plans--get benefits from both the CSRS and FERS programs. Benefits are paid in a single check, but they are computed differently.
FERS annuities are not fully inflation-indexed and begin only when the retiree has reached age 62. Benefits under the CSRS system are fully indexed to inflation and begin as soon as the individual retires, regardless of age.
Many retirees have noticed that active-duty federal workers are in line for a 4.4 percent pay raise in January. That's the amount tentatively set by the Clinton administration. But the pay raise could be higher if Congress links it to the percentage increase in the works for military personnel. Military personnel are in line for a 4.8 percent increase in January.
Many federal civilian and military retirees wonder why their January COLA will be so much smaller than the pay raises proposed for active-duty personnel.
The short answer is: A COLA is a COLA, and a pay raise is a pay raise. Although often confused, they are two very different statistical animals.
Years ago, Congress decided to protect federal civilian and military retirees (including retired members of Congress and their spouses) from the ravages of inflation, which halves the value of a fixed pension, on average, every 10 years. So those annuity payments, in addition to Social Security benefits, were indexed to the CPI. (COLAs, however, are virtually unknown in private-sector pension plans.)
Unlike COLAs, which are intended to keep pace with inflation, workers' pay raises reflect market pressures.
Raises for active-duty federal workers are based on a variety of factors, including the budgetary situation (there is now a surplus), the political climate and wage changes in the private sector. Private-sector pay, in turn, is influenced by union contracts, profits, productivity and employers' needs to hire and keep employees. In times like these--when unemployment is at a near-record low--companies scramble to get and keep qualified workers. That translates into pay raises.
During times of high inflation--which sometimes coincide with high unemployment--the pay raise-vs.-COLA situation is often reversed. There have been many times when federal civilian and military retirees' COLAs were much higher than the percentage pay raises approved for active-duty personnel.
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Thursday, Aug. 19, 1999