Negative COLA

General Questions
#1

No, not a new brand of soft drink, but rather Cost Of Living Adjustments that adjustment downward.

Certain payment amounts are adjusted yearly based on inflation, usually as measured by the CPI. Social Security payments, for example. Also I believe some union contracts have provisions for hourly wages to be adjusted this way. In some states (including here in Oregon), the minimum wage is indexed similarly.

Now we’ve a lot of inflation, caused mainly by the run-up in fuel prices. This has led to some big COLAs. For instance, the minimum wage here in Oregon will go up by 45 cents to $8.40 in January. That’s about a 5.6% increase. This figure is determined in August or September and probably is based on the 4 quarters ending in June 30th or possibly the end of July.

At any rate, it’s a huge jump and the calculations included pretty much all the inflation caused by fuel prices. Now those prices have come way down and we’re entering a recession that promises to be severe. It wouldn’t surprise me in the least if we had some deflation during the recession.

So if we did have some deflation, will the aforementioned COLAs actually reduce these payments/dollar amounts? Did the people who wrote the laws only allow for increases or did they assume that we’ll never get deflation and didn’t worry about it? Or perhaps they thought negative COLAs would be a good idea in case of deflation?

#2

There is an investment forum named Bogleheads, via which this question was raised a couple of weeks ago with respect to Social Security payments. It’s a short thread and an answer (SS COLA can’t be negative) is given in post #4.

I hesitate to vouch for the accuracy of this information only because the contributor quotes and interprets a relevant piece of Social Security law which eludes my comprehension skills.

#3

We have had COLA’s in all of our contracts since the early 80’s. In that time I can think of a handful of times we have had negative COLA’s. The biggest was a few years ago, we lost 17 cents an hour.

Speaking of union contracts, my union and the big bad airplane company have come to a tentative agreement and we will vote on a new contract this Saturday. From what I am hearing on the news, I will be going back to work next Monday.

#4

Racer, may I hijack and ask you about those negative COLAs?

Is your COLA linked to inflation, or some other benchmark, or what?

I’ve only worked for places without contractual COLAs, so I’m curious how it would work - I can’t imagine any of my coworkers going for a pay cut, even in the face of moderate deflation.

#5

According to my 2002 contract handbook, COLA is based on what is called a GFI index. Our contract also states that all COLA payments are to be adjusted every 3 months and that COLA payments are not a permanent part of our hourly wage. But every 3 years with every new contract, the previous 3 years of COLA is made permanent. The contract also states that if the GFI index would result in a negative COLA, we can only lose the previous positive amounts, it cannot cause a take away of our base hourly wage. With the economy in the tank right now we would like see negative GFI indexes and the resultant negative COLA. How this will affect me, I will find out Monday if we ratify a new contract this Saturday.

#6

In the buildings our union did have a COLA clause. They were baised on consumer price index. Most contracts call for a mim of 2 or 3 percent, and some had a cap around 8 percent.

#7

Our annual COLA is based on CPI and has been running at 3% for several years. Last year it was up to 4.2%. It’s not adequate because the places our workers are living are increasing at a greater rate than CPI.