Proponents of the chained
CPI say it more accurately re- flects changes in annuitants’ cost of living by recognizing that their pur- chasing behavior changes as prices change. If the price of beef rises, for example, consumers might pur- chase more chicken and less beef. The real issue with the chained
CPI is whether one is measuring changes in prices or changes in qual- ity of life. If one continues the logical progression of the argument, consum- ers might find themselves substituting hot dogs or pasta for chicken, etcetera. MOAA thinks the COLA process
likely will be high on the agenda for action in 2011, if only because the ef- fects of COLA changes seem small to the public — and because the potential effect seems even more diminished when federal annuitants have seen no COLAs for the past two years. The Bureau of Labor Statistics
has estimated implementation of the chained CPI would cut COLAs
by about one-quarter of a percentage point a year. The
DoD actuary’s assumption for the military retirement fund is that in- flation will average 3 percent a year over the long term. Using those two estimates, apply- ing chained-CPI COLAs for a ser- vicemember retiring at age 42 would yield about 10 percent less in his or her retired paycheck at age 80 rela- tive to the current COLA system. This example illustrates the pow- erful compounding effect of even very small COLA adjustments over time — both for protecting beneficiary purchasing power and for generating cost savings for the government. Most servicemembers don’t real- ize about 50 percent of total lifetime retired pay for a 20-year military retiree will come from COLAs (see chart on facing page). The chained CPI is the very small-
est COLA proposal federal annuitants might see in the next few years.
As previously mentioned, one pos- sibility is delaying any COLAs until age 60 or later. Individual members of the fiscal commission in the past have proposed barring COLAs on annuity levels above some set dollar amount or reducing the CPI by one- half percent or a full percent a year. The chart below illustrates the potential effect on retired-pay pur- chasing power over time. COLAs are more important to
military retirees and the disabled than most other categories of beneficiaries, mainly because they start drawing their annuities at younger ages and thus experience the compounding ef- fects over a greater number of years. To the extent that COLAs fail to keep up with living costs, real purchasing power continues to decline ever more dramatically as long as one lives. MOAA is determined to preserve the intended purpose of COLAs — to protect annuitants’ purchasing power against [CONTINUES ON PAGE 100]
Purchasing Power Loss from COLA Cuts
Cutting COLAs reduces the real purchasing power of retired pay over time. This chart shows how the percentage loss of various levels of COLA cuts imposes ever-greater purchasing power losses the longer a retiree lives. (Chart assumes military retirement at age 42.)
42
0% -5%
-10% -15% -20% -25% -30% -35% -40% -45% -50%
48 54 60 66 72 78 84 90 96
• Chained CPI
• CPI -0.5% • CPI -1.0%
MARCH 2011 MILITARY OFFICER 85
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