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COLA won't go negative as consumer prices fall

But 2010 may bring zero adjustment

Feb. 12, 2009 - 01:30PM   |   Last Updated: Feb. 12, 2009 - 01:30PM  |  
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Although the cost of living is falling, paychecks for military and federal civilian retirees won't get smaller under current federal law.

For the first three months of fiscal 2009, the Consumer Price Index has dropped 5 percent, a sign of a weak national economy in which the "market basket" of food, lodging, transportation and health care services that comprise the index are getting less expensive.

Since the index — known as the CPI — is the basis for automatic increases each Dec. 1 in Social Security, military and federal civilian retired pay and other federal entitlements, the decline has some retirees worried that their government checks might shrink next year.

"Everything is in the negative, and I worry if there will be no COLA or a negative COLA," said retired Army National Guard Col. Jerry Scanlan, a former chaplain who said he is closely watching falling prices.

But, in the world of government pensions and retirement checks, what goes up does not necessarily come down, said Steve Strobridge, government relations director for the Military Officers Association of America.

Strobridge said there is "no such thing" as a negative cost-of-living adjustment. "If prices drop, the only thing that happens is there is no COLA."

But Strobridge warned that no COLA increase next year is a real possibility.

"With the CPI down 5 percent for the first three months, the only way there will be a COLA in December is if prices rise more than 5 percent in the next nine months," he said.

A 5 percent increase in nine months has happened just once in the past 19 years.

"It just happens that the one time was last year," Strobridge said, when soaring crude oil prices pushed up gas prices and increased transportation, retail, food and heating costs.

That led to http://www.militarytimes.com/money/retirement/military_COLAexplained/">a COLA of 5.8 percent for 2009, which took effect last month — the largest retiree pay adjustment since 1983.

Scanlan, told of what it might take for retirees to get a COLA increase next year, said maybe he doesn't need one.

"I would rather not return to $4 a gallon gasoline, if that's what it would take to get an increase," he said. "Maybe it's possible that Congress, as it works on an economic stimulus bill, would decide that retirees deserve at least a small COLA rather than nothing.

"A 1 percent increase would spike up some retirees."

The Social Security Administration, which calculates the COLA that also applies to government retirement, confirms Strobridge's conclusion. Under the Social Security Act, the annual increase is based on the average of consumer prices in July, August and September for the current year compared to the average for the same three months in the previous year.

In an "extended period of deflation" that leaves consumer prices less than the previous year, "there would be no COLA effective for December," according to the Social Security fact sheet.

However, even if retirees don't get a COLA increase, they won't lose out. The COLA is designed to maintain retirees' purchasing power as inflation rises. If the cost of living falls, but retiree pay remains steady, their purchasing power increases.

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