Breathes there the man with soul so dead,

Who never to himself hath said, "Don’t mess with my COLAs!"

With apologies to Sir Walter Scott, that’s what I would expect to hear from every federal civilian and military employee and retiree when he reads the proposals made by the Congressional Budget Office to change the way that cost-of-living adjustments are determined for 1) civilian and military pensions and VA benefits and 2) Social Security benefits. In this article, I’ll stick to the effect such a change would have on civilian annuities and Social Security benefits.

While Social Security cost of living adjustments are based solely on the CPI-W for urban wage earners and clerical workers, how they are applied to civilian annuities differs depending on whether you are covered by CSRS or FERS. Under CSRS, you have full protection based on the CPI-W, regardless of the age at which you retire. Under FERS, with the exception of special category employees, you only receive them when you reach age 62. And the amount you receive varies according to the CPI-W. When that figure is less than 2 percent, that’s what you get. If it’s between 2 and 3 percent, you get 2 percent. If it’s greater than 3 percent, you get the CPI-W minus 1 percent.

CBO recommends that all COLAs be based on the CPI-U, the consumer price index for all urban consumers, instead of the CPI-W. If that were done, it estimates that the CPI-U would grow a quarter percent more slowly than the CPI-W. Slower growth means lower COLAs, which in turn means a reduction in mandatory outlays. That would result in saving for civilian and military pensions and veterans benefits of $6 billion between 2012 and 2016 and $24 billion from 2012 through 2021. The savings to the Social Security side of the ledger would be about $27 billion over five years and $112 billion through 2021.

CBO’s main argument in favor of such a change "is that the CPI-W overstates increases in the cost of living, so using the chained CPI-U would reduce federal outlays while still insuring that benefits do not fall relative to the cost of living after a recipient becomes eligible for those benefits." Even with such a reduction, federal pension plans would be offering more protection than the majority of private pension plans.

The potential downside is that "the prices faced by annuitants could rise faster than the prices faced by the population at large. In particular, annuitants are likely to spend more than younger people do for medical care, the price of which generally grows faster than the prices of many other goods and services."

Next time I’ll let the other shoe drop and talk about CBO’s proposal to link Social Security benefits to average prices instead of average earnings.