How COLA Is Not the Answer to Inflation For RetireesJohn Sanders
Cost of living adjustment – or Cola, for short – is a simple idea for federal retirees. But, depending on which system you’re in, you’ll find many aspects of the adjustment different from other federal employees. These differences could be related to how soon you get the adjustment and, most importantly, how much.
With inflation levels hitting a 40-year high, experts believe that the cost-of-living adjustment will be substantially higher than in previous years. Inflation levels are not the only concern. Moreover, one-third of all federal employees are over 55 and close to retirement. The state offers COLAs To try and combat the increasing prices as these employees near retirement
Chris Kowalik, a retirement expert for FedImpact.com and who founded ProFeds, has the following to say about COLA: “When you retire, the pension that you get is set…From that point, your pension only goes up if the cost of living is getting more expensive.”
Kowalik further believed that COLA was entirely designed to help retirement dollars move along with the level of inflation. Countering it was never in the cards. In actuality, COLA is just another tool for federal workers to use while designing their retirement plans.
Who’s Eligible For COLA?
COLA isn’t just for federal workers. But instead, individuals who have served in the military are also eligible for the allowance. However, this eligibility depends on where they live. On the other hand, there are two retirement plans that federal workers can use. The first one is the Civil Service Retirement System (CSRS), which has existed far longer than the second – more recent – system. Despite how old the system is, the registered workforce under this plan is still less than 5%.
The second plan is the Federal Employees Retirement System (FERS). You’ll mostly be able to register for the program after reaching 62, except for certain positions such as Law enforcement, firefighters, etc.
While this may seem fair, the reality is that even if you were to retire at 57, you’d end up missing five years of COLA with no compensation.
However, the federal employees’ scheme allows registered retirees to “Diet COLA.” Diet COLA kicks in when the cost of living exceeds 3%. The retirees get a rate of 1% less than the COLA for CSRS, leaving them behind inflation right at the start.
How Can You Measure COLA?
Calculating COLA is a bit tricky. Most retirees don’t have an idea about how COLA adjustment works and aren’t able to plan according to it. Usually, COLA is calculated using the Consumer Price Index for Urban Wage Earners and Clerical Workers, a variation of the Consumer Price index.
A “basket of goods” determines price increases over time. The list includes differently weighted items such as food, housing, and more. However, it still doesn’t have a comprehensive list of things people spend their money on, such as medical expenses. Hence, making the measure somewhat ineffective.