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COLA change could cut retiree benefits

Jul. 6, 2011 - 11:25AM   |   Last Updated: Jul. 6, 2011 - 11:25AM  |  
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A possible change in how cost-of-living adjustments are calculated for military retired pay may sound small — just an average 0.25 percentage point reduction — but it could result in big lifetime losses.

An E-7 retiring this year with 20 years of service would, over 40 years, receive $109,335 less in retired pay, a 5.6 percent loss.

An O-5 retiring this year with 20 years of service would receive $207,991 less over 40 years, a 5.5 percent difference.

The potential COLA calculation change has been under discussion by White House officials and congressional leaders as part of a larger package of cuts in federal spending, with talks under way on Capitol Hill and at the White House.

Military retired pay would not be singled out for the change; it would also apply to federal civilian retired pay, Social Security, and most likely to veterans disability and survivors benefits. Unlike military retired pay and other federal entitlements that adjust automatically each Dec. 1 based on changes in consumer prices, veterans-related benefits increase only through an act of Congress, although lawmakers traditionally provide the same percentage increase for veterans that goes to other federal entitlements.

COLAs currently are tied to changes in the Consumer Price Index for Urban Wage Earners, which surveys the costs of goods and services done by the Labor Department's Bureau of Labor Statistics. There has been no COLA increase for the last two years because overall costs have been flat, but historically the index, known as CPI-W, has increased an average of 3 percent a year.

Under consideration is changing to a different index, the Chained Consumer Price Index for Urban Consumers, or the C-CPI-U, which includes non-wage earners and uses a different calculation for costs.

Over the last year, the CPI-W has increased 3.6 percent but the C-CPI-U has increased by 3.3 percent. Government economics project that overtime, the difference between the two indexes is about 0.25 percent.

There has been a big outcry over what effect this could have on Social Security recipients, who according to some estimates would receive $500 less at age 75 than they do under the current formula.

But a change in COLAs has a bigger effect on military retirees because they retire at a younger age and receive COLAs over a longer period, said Steve Strobridge of the Military Officers Association of America. "The longer you live, obviously, the more it compounds," he said.

An E-7 who retires this year with 20 years of service would receive about $860 less a month in retired pay at age 75 if the COLA formula changed. For an O-5, the retired pay difference would be about $1,390 a month.

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