Federal retirees get COLA bump in 2012

Tuesday - 10/18/2011, 3:03pm EDT

By STEPHEN OHLEMACHER
Associated Press

(This story has been updated).

WASHINGTON (AP) - Some 55 million Social Security recipients will get a 3.6 percent increase in benefits next year, their first raise since 2009. The increase was announced Wednesday when the government released a key measure of inflation, which determines whether people who receive Social Security get a cost-of-living adjustment, or COLA.

The Social Security Administration uses the average monthly index — of the Consumer Price Index — for the third quarter of 2011 and compares it to the third quarter average from the last year that a COLA was activated — in this case, 2008.

Federal retirees

The cost-of-living increases affect federal retirees differently than the general public.

Federal retirees under the old Civil Service Retirement System receive the full COLA amount.

However, retirees in the Federal Employees Retirement System, will receive a 2.6 percent COLA — 1 percent less than general Social Security recipients.

That's because of the slightly different system for FERS retirees.

If the COLA is more than 3 percent, FERS retirees receive 1 percent less than the general increase. If the COLA is between 2 percent and 3 percent, FERS retirees receive just a 2 percent increase.

Also, most FERS retirees will not have the COLA applied to their annuity until age 62.

Long two years

There was no COLA in 2010 or 2011 because inflation was too low. That, however, has been small comfort to the millions of retirees and disabled people who have seen their retirement accounts dwindle and their home values drop during the economic downturn.

And some of the increase in January will be lost to higher Medicare premiums, which are deducted from Social Security payments. Medicare Part B premiums for 2012 are expected to be announced next week, and the trustees who oversee the program are projecting an increase.

Monthly Social Security payments average $1,082, or about $13,000 a year. A 3.5 percent increase would amount to an additional $38 a month, or about $455 a year.

Most retirees rely on Social Security for a majority of their income, according to the Social Security Administration. Many rely on it for more than 90 percent of their income.

Mark Zandi, chief economist at Moody's Analytics, said the COLA would give a boost to consumer spending next year, amounting to about $25 billion in government support, or 0.2 percent more economic growth, if beneficiaries spend it all. For comparison, last year's 2 percentage point cut in Social Security payroll taxes was worth $115 billion to U.S. households.

"It is not a magic bullet for the economy, but it will certainly be a positive for households on fixed incomes," he said.

How it's calculated

Federal law requires the program to base annual payment increases on the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). Officials compare inflation in the third quarter of each year - the months of July, August and September - with the same months in the previous year.

If consumer prices increases from year to year, Social Security recipients automatically get higher payments, starting the next January. If price changes are negative, the payments stay unchanged.

Only twice since 1975 - the past two years - has there been no COLA.

Wednesday's COLA announcement will come as a special joint committee of Congress weighs options to reduce the federal government's $1.3 trillion budget deficit. In talks this summer, President Barack Obama floated the idea of adopting a new measure of inflation to calculate the COLA, one that would reduce the annual increases.

(Federal News Radio's Jack Moore contributed to this report).