Price index change could affect retiree COLAs

A change in the way the Consumer Price Index is calculated could reduce the yearly cost of living adjustments given to 3.9 million military and federal retirees.

The Bureau of Labor Statistics announced last week that it will change the way it calculates the CPI beginning in January 1999. The annual percent change in the CPI is used by the Office of Personnel Management to calculate COLAs. The switch will likely shave about 0.2 percentage points off the CPI each year, which tends to rise. The CPI is a measure of the average change over time in the prices paid by urban consumers for consumer goods and services.

For Federal Employees Retirement System participants, the yearly COLA depends on the annual percentage change in the CPI. If the CPI increases by 3 percent or more in any year, then the COLA equals the CPI minus one percentage point. If the CPI increases by between 2 percent and 3 percent, the adjustment is 2 percent. If the CPI increase is 2 percent or less, the adjustment equals the CPI.

For example, for the 12-month period ended in March, the CPI level of 158.7 was 1.1 percent higher than the index in March 1997. So federal federal annuitants in FERS would receive a 1.1 percent COLA if it was issued now.

Civil Service Retirement System participants receive COLAs determined by the average CPI for the third quarter (July through September) of each year as compared to the third quarter average CPI index of the previous year.

Under the new calculation system, the change in CPI for 1999, which would affect the 2000 COLA, will be 0.2 percent lower than 1998's average change in CPI of 2.1% percent, assuming no other factors change. For FERS employees this would mean the 2000 COLA would be 1.9 percent. CSRS annuitants' COLA can only be calculated when the Bureau of Labor Statistics receives the 1999 third quarter averages.

Officials at the Bureau of Labor Statistics said the new method of computation will more accurately reflect the impact that changing prices have on the average U.S. household.