Analysis: Lower COLA formula ignores soaring health care

Wednesday - 7/13/2011, 1:10pm EDT

Your Turn with Mike Causey

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By Jolie Lee
Federal News Radio

The Obama administration and lawmakers from both political parties are warming to a lower cost-of-living adjustment formula for retirees' annuity. The proposal is part of budget talks as the government nears the Aug. 2 deadline to increase the debt limit.

The proposal, first recommended by the President's debt reduction commission, calls for a switch to a Chained Consumer Price Index to measure inflation. The Chained CPI operates under the assumption that consumers will buy lower cost alternatives in a down economy.

However, the Chained CPI does not take into consideration the rise of health care costs, a burden felt most by retirees, said Dan Adcock, legislative director for the National Active and Retired Federal Employees (NARFE) in an interview with Your Turn with Mike Causey.

By some estimates, annual reductions in annuity could total as much as $1,000 a year using a Chained CPI.

The proposal would cut Social Security benefits by $112 billion over the next decade, according to the Congressional Budget Office. It would cut government pensions and veterans' benefits by $24 billion over the same time period.

The lower COLA would affect three major retirement systems - social security, FERS and military, Adcock said.

Retirees have not received a COLA for the past two years because of negative inflation. As the economy improves, a switch to the Chained CPI and thus a lower COLA could have a "huge impact" on older Americans, Adcock said.

"Regrettably for some, they're going to have to choose between food and medicine and doctor's visits," he said.

Health care costs may get 'worse and worse

Another proposal in the fiscal commission report suggests setting a limit to the government's contribution toward federal retirees' and employees' health care premiums.

Currently, the government pays about 70 percent of the premium, and retirees and employees pay the remaining 30 percent, Adcock said.

The proposal would cap government contributions at the gross domestic product's percentage of growth, plus 1 percent. However, this index would almost always be less than health care inflation, Adcock said.

That means "every year, more and more costs are being shifted away from the government and toward retirees and employees," he said.

"It gets worse and worse every year," he added.

In a 10-year period, federal retirees and employees could end up paying 45 percent of their health care premium, Adcock said.

The Associated Press contributed to this story.

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Mike Causey also spoke with Steve Losey, senior writer, and Steve Watkins, editor, at the Federal Times, about other benefits that may be on the chopping block and the status of hiring reform efforts.