If you've become addicted to COLAs - cost-of-living adjustments in your Social Security or military pension - you may be forced to kick the habit. Federal Reserve Board chairman Alan Green-span has proposed trimming the national debt by adjusting COLAs to reflect the true rate of inflation.
The consumer price index (CPI), he says, overstates the inflation problem and plays havoc with various government programs that are adjusted to keep up with rising costs.The idea appeals to many members of Congress because finagling with COLAs could go a long way toward balancing the budget without painful overt spending cuts or tax hikes. Reducing COLAs by one percentage point, as Greenspan has suggested, would produce $150 billion in savings over five years.
But money would have to come out of - or not go into - somebody's pocket. It might be yours. Social security recipients would take the biggest hit. They got a 2.8 percent COLA this year, so someone with a $1,000-a-month benefit in 1994 is receiving $1,028 a month now.
If the COLA had been squeezed to 1.8 percent, this year's benefit would have been $1,018 - reducing the beneficiary's income by $120 this year.
The cost to the beneficiary and the savings to the government would compound over time. Those who receive federal employee and military pensions or veterans' benefits are also on the front line of the COLA war because their payments are indexed to the CPI, too.
Don't think you're safe if you're not a retiree or a veteran. Federal tax brackets are adjusted each year with the CPI to prevent inflation from pushing people into a higher bracket. Personal exemptions, the standard deduction and the amount of investment income a child can receive tax-free are also tied to the CPI.
With a "diet COLA," everyone's tax bill would go up. A squeeze on government COLAs would probably spill over into the private sector.
"The CPI is used to distribute a lot of income among parties," says Joel Popkin, an economist and former assistant commissioner of the Bureau of Labor Statistics, the government agency that computes the CPI.