Low oil prices block retirees' cost-of-living adjustment

By Tom Philpott
milupdate@aol.com
September 3, 2009

It was higher oil prices last year that led to the largest annual cost-of-living adjustment to federal entitlements since 1982. Good thing, too.

This year, lower oil prices are almost certain to block any cost-of-living adjustment for military retirees, federal civilian retirees, social security recipients, survivor benefit annuitants or disabled veterans.

The expected adjustment "goose egg" will be the first since Congress began to adjust federal entitlements automatically using inflation rates as tracked by the U.S. Bureau of Labor Statistics. The cost of goods and services has fallen nationwide this year. No inflation means no cost-of-living adjustment. What happened?

"Gas prices," said Malik Crawford, an economist at the bureau's headquarters in Washington, D.C.

The federal adjustment is based each year on the average change in the cost of a market basket of goods and services from the third quarter (July through September) one year to the third quarter of the next year. Through July, the cost of living for U.S. wage earners has fallen by 2.7 percent.

"That's huge," Crawford said.

Though fuel prices are just one item given "small official weight" in the market basket tracked by the bureau, Crawford said, "they have an outrageous impact" on overall prices because transportation costs affect the cost of everything that needs transport to market.

"It's not like gas prices are great" now for consumers, Crawford said. "They are almost back up to $3 (a gallon). But they are still a full dollar below where they were last year. To go from $4 to $3 is a 25 percent fall. You go 25 percent down (in gas prices) and you're down 2.7 percent (over all). ... That's how the math plays out."

If prices climb sharply in August and September, is a cost-of-living adjustment still possible? Unlikely, said Crawford. Price data already are in for most of August, he said. Only a spectacular spike in September, which is highly unlikely, could trigger an adjustment effective Dec. 1 and payable in January.

"Israel would literally have to attack Saudi Arabia for that to happen," Crawford said. "And I mean like bomb them, not just threaten."

The adjustment last December was 5.8 percent, the largest in nearly three decades. To get that, Crawford said, federal retirees and social security recipients "really lucked out. ... Gas prices peaked in the third quarter last year."

If no adjustment is paid to social security recipients, said Dan Moraski, spokesman for the Social Security Administration, the law would protect many of them from an increase in Medicare Part B premiums in January.

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