2016 COLA Slipping Away

2016 COLA Slipping Away

colaAs we enter into September, forecasts for 2016 are becoming are starting to become much clearer. With October only weeks away, it is seemingly less likely that retirees and Social Security recipients will receive a Cost of Living Allotment (COLA) increase in 2016 – this will only be the third time in the last 40 years Social Security benefactors will not see a COLA adjustment.

The main driver for the less than exciting news is the lack of growth for the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). The numbers are almost identical to the numbers from June and July.

Volatility in oil prices has resulted in substantial volatility in recent cost-of-living adjustments. A large cost-of-living adjustment in December 2008 was followed by no cost-of-living adjustments in December 2009 and December 2010. More recent volatility in oil prices has again affected the CPI. As a result, projections under the intermediate- and high-cost assumptions do not have a cost-of-living adjustment for December 2015.”

Over the last 12 months, the CPI-W has surprisingly decreased by 0.4 percent to a level 233.804 average. In comparison, at this time last year, the level was at 234.242. If there is going to be a COLA adjustment for 2016, it is determined by the average of July, August and September 2015 compared to the same quarter of 2014. The percentage increase seen between the two is what determines if federal retirees will receive COLA in the following January.

The formula utilized to determine a COLA increase is not as simple as it may seem, and is very complicated.

Civil Service Retirement System (CSRS) and Organization and Disability Retirement System (ORDS) have their COLA applied to their monthly benefit amount prior to any deductions, and is rounded down to the next whole dollar.

Whereas, the Federal Employees Retirement System (FERS) has even more nuisances. If the CPI increase is 2 percent of less, the COLA will equate to the CPI increase. If the CPI grows by more than 2 percent, but less than 3 percent, the COLA adjustment will be 1 percent less than the CPI growth. And if the CPI increase is more than 3 percent, the adjustment is 1 percent less than the CPI increase. All new amounts are down to the next whole dollar.

FERS and Special COLA are not accessible until the age of 62, except for employees who are receiving disability, survivor benefits and other special provision retirement benefits. FERS disability retirees are eligible for COLA, unless they are receiving a disability annuity grounded on 60 percent of the employees’ high-3 average salary.

Beneficiaries who also receive a CSRS benefits are also subject to the CSRS COLA calculation. FERS survivors will receive a FERS increase on their complete annuity, even when a service component is also involved.

For retirees to qualify for a COLA adjustment in their retirement check, the benefactor must have already been receiving a payment for a full year. For retirees who did not receive payment the year prior, the adjustment will be prorated; the retiree will receive one-twelfth of the increase for each month they received benefits.

In conjunction to this, Medicare Part B premiums for higher-income Americans are set to significantly rise in 2016. The rise is a direct response no COLA adjustments for Social Security recipients and negligible inflation. A “flap in the Medicare program” will be created by the 70 percent of beneficiaries who are “held harmless.”

By law, when higher costs are charged to the Medicare system, they must be paid by the beneficiaries. However, since many beneficiaries are on a fixed income, the beneficiary will not pay a higher premium and will be “held harmless,” leaving higher-paid enrollees and new-enrollees paying substantially higher premiums.

There is still a slight chance that there will be a COLA adjustment for 2016 if record-breaking inflation occurs. Realistically, it does not seem probable that retirees will receive a COLA for 2016 until the official report is delivered in mid-October.

Current federal employees are expected to receive a COLA adjustment of 1.3 percent in January of 2016 regardless of other COLA adjustments.

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