When measuring the COVID-19 emergency’s impact on the nation’s economy, there are many variables that aren’t usually in play during normal years. The CPI-W (Consumer Price Index for Urban Wage Earners & Clerical Workers), provided by the Dept. of Labor, saw its biggest drop in the month of April since 2008’s ‘great recession.’ For FERS and CSRS annuitants, and those receiving social security benefits, their COLAs are directly tied to the CPI-W. If the CPI-W increases 0.5%- then so does the monthly amount paid from their pension. For 2020, based on the 2019 inflation figures, it was 2.8%. Although the likeliest scenarios at the moment depict either an increase that is less than 1% or a decrease (aka ‘deflation.’) If deflation occurs, the COLAs sit at 0% for the year, however, everything below zero is subtracted from the following year’s positive inflation. Items that would cause an increase for 2020 include: disruption to the food industry could cause the price index to rise, an economic recovery could occur that is faster than expected, and if the trade war with China resumes, that would lift prices on some consumer goods. The virus’ impact on the travel, dining, and auto industries has been devasting, however, and so the US’ economic growth is expected to be slow. Already existent issues like an upcoming Presidential election, trade battles with various international powers, and civil unrest, then coupled with the coronavirus’ blows to the economy, results in a COLA that is currently expected to be between 0 and 1%.
If it were above 2%, like it was last year, that’s when FERS annuitants have to pay more attention to inflation. While a CSRS retiree can expect a 1-for-1 match in terms of their COLA’s relationship with the CPI-W index, their FERS counterparts cannot. If the inflation percentage is between 2 and 3%, FERS annuitants get a flat 2%- this is sometimes referred to as “diet” or “flat” COLA. If above 3%, retirees with a FERS pension will see their COLA equal the growth of the CPI-W index, minus 1%. So 4% inflation would mean a 3% COLA.
Until Next Time,
**Written by Benjamin Derge, Financial Planner. The information has been obtained from sources considered reliable but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of Benjamin Derge and not necessarily those of RJFS or Raymond James. Links are being provided for information purposes only. Expressions of opinion are as of this date and are subject to change without notice. Raymond James is not affiliated with and does not endorse, authorize, or sponsor any of the listed websites or their respective sponsors.