- The Washington Times - Monday, August 30, 2004

The cost of living — the number of dollars and cents it takes you to put gas in the car, food on the table and clothes on your back — is down. That ought to be good news for just about everybody.

But a lot of people, including retired government types, are not dancing in the street. The reason: If the pump price of gasoline continues to decline, 80 million Americans — including several million former federal and military personnel — will get smaller January cost-of-living adjustments than they have been expecting.

Cost-of-living-adjustments (COLAs) are automatic for retired civil servants and postal retirees, retired military personnel, and recipients of monthly Social Security checks and food stamps.

Unlike federal pay raises — which are set by Congress and the White House — the retiree COLAs are automatic. They are triggered by a yearly rise or fall in the rate of inflation in the third quarter — the period covering July, August and September. The inflation rate is measured by the Bureau of Labor Statistics’ Consumer Price Index (CPI). That has gone up every year since the COLA system was started, because of constantly rising living costs. In years of low inflation rates, the COLA has been small.

Gasoline prices are only a part of the overall CPI market basket, but they are an important part.

In addition to the fuel you use to get to work, school or the supermarket, lower gasoline and oil prices are reflected in reduced manufacturing and transportation costs in every industry, from plastics to chicken. Low inflation is a good thing for most people, but some retired feds don’t like it, or don’t understand its benefits when it means a lower-than-expected raise.

They say they are spending more regardless of what the government says, and they want the maximum raise each January.

Here is why some people are confused by the drop in living costs: When the June CPI came out in July, it indicated that retirees were due a 2.8 percent raise. But when the July CPI was released last week, it showed that the overall CPI — which measures a variety of goods — had dropped. As a result, the January COLA now stands at 2.6 percent.

There are still two months of calculations — from August and September — to go in the COLA countdown.

January pay raise

Don’t spend it yet, but don’t despair that white-collar feds will get shortchanged in January. The Bush administration continues to push for a 1.5 percent raise for civil servants and 3.5 percent for the military. But both the House and Senate — with the backing of leaders from both political parties — are insisting on pay raise parity between the two government groups.

If Congress prevails and feds get the higher percentage increase, as has happened every year since 1993, feds will get the higher amount.

This year, feds got a split pay raise. They got the portion President Bush approved at the end of 2003 on time. Congress bumped up the raise a notch in mid-January, but not in time for payroll offices to combine the two. So, many workers this summer got the retroactive portion of the second raise, which also took effect with the start of the first pay period in January.

In fact, the State Department just made the retroactive adjustment for some workers.

Automatic pilot investing

Analysts say many federal, postal and military investors are too conservative with their Thrift Savings Plans. The TSP is the giant federal-military 401(k) plan. It offers workers five funds that cover the U.S. and foreign stock markets, plus a safe but low-returning Treasury securities fund. Many feds — who worry about the market’s ups and downs or don’t think about long-range investments — keep their money in the safe but unsexy G Fund.

Investment planners say plan participants, especially if they are younger, should diversify and put some money into higher-risk funds. But finding the right mix that won’t keep the investor up at nights isn’t easy.

Enter the L Fund, which the TSP will begin offering next year.

Workers who enter the L Fund will have their investments divided among some or all of the five existing funds based on when they plan to start withdrawing and spending their investment nest egg. The fund will keep rebalancing their portfolios, which easily can get out of whack when some funds perform better than others.

Rule of thumb: The L Fund concept isn’t for everybody, but just about everybody should consider it when it is offered in 2005.

Mike Causey, senior editor at FederalNewsRadio.com, can be reached at 202/895-5132 or [email protected]

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