January COLA? Up, up and away!

Federal, military and Social Security retirees are in line for a cost of living adjustment (COLA) that could be their biggest in more than a decade. Current projections of the size of the inflation catchup range from 3% to as much as 4.7%.

The higher 4.7% estimate comes from the Senior Citizens League, which says it would be the highest COLA since 2009 when retirees got 5.8%, reflecting price increases as the nation climbed out of the Great Recession.

The final amount of the 2022 COLA won’t be determined until living costs for July, August and September are tallied. That final figure won’t be announced until early October.

Most recipients of Civil Service Retirement System (CSRS) and military and social security benefits will get the full COLA. Their benefits are linked to the official increase in inflation from the third quarter of this year over the third quarter of the previous year. And they are automatic. Most current federal retirees are under the CSRS program and will get the full amount of the 2022 COLA. But those who are under the newer Federal Employees Retirement System (FERS) plan — the majority of current workers and of future retirees aren’t guaranteed full inflation protection. COLAs for them don’t kick in until they are 62 or older, and the amount of the COLA is 1% less than the full inflation rate if it is 2% or higher. So if the COLA is 3%, they would get 2% in January. If it is higher, like the 4.7% estimate, they would get 3.7%. This year all retirees got a 1% COLA.

When Congress created the FERS program, it put civil servants under Social Security for the first time. And it gave they a more generous 401k plan option which includes a matching government contribution of up to 5%. CSRS employees do not get any government match to their Thrift Savings Plan accounts. In addition to getting a smaller federal annuity based on their contributions, cost of living adjustments for FERS retirees don’t begin until age 62.

Arthur Stein, a Washington area financial planner specializing in federal investors estimates, says that thanks to reverse compounding, the diet COLA can over an extended period of time reduce FERS retirees total income by as much as 30%. For more on what inflation over time can do to a FERS annuity, and what you can do to minimize the damage, click here.

The January federal pay raise is a different animal. The amount each year is set by Congress and the White House based on political and fiscal conditions. This year, active duty civil servants got a 1% raise. President Biden has proposed a 2.7% pay raise while some House Democrats are pushing for a 3.2% increase. Under the House plan, 1% of the raise would be allocated to locality pay, meaning that feds in areas like Washington D.C., San Jose-San Francisco, Houston, New York City and Chicago would get bigger raises than their counterparts in Louisville, Salt Lake City or Fargo.

Although often confused, there can and usually are major differences between a federal pay raise and a COLA for retirees. When Congress gets a raise, many members refer to it as a cost of living catch-up, even though the final amount is often a political call with little or no relation to the rate of inflation as measured by the Bureau of Labor Statistics Consumer Price Index-W. That’s a city-by-city pulse check by the Labor Department on prices for a market basket of goods. Groups representing retirees, such as the National Active and Retired Federal Employees (NARFE), say the government should be using the CPI-E — for elderly — that takes into account higher costs for retirees for things like health care and prescriptions. While both CPI indexes measure food, drink, housing, clothing, transportation and costs for education and recreation, the CPI-E gives greater weight to medical costs. That would benefit most retirees in the form of higher COLAs.

Nearly Useless Factoid

By Alazar Moges

RSVP, while commonly known to most non-French speakers simply to signal a reservation response to an invitation, actually stands for “répondez s’il vous plaît,” French for “please reply.”

Source: Cambridge Dictionary

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THRIFT SAVINGS PLAN TICKER

Oct 25, 2021 Close Change YTD*
L Income 23.3259 0.0178 3.52%
L 2025 12.1258 0.016 6.40%
L 2030 43.0454 0.0751 7.92%
L 2035 12.9555 0.0247 8.58%
L 2040 49.1328 0.1015 9.26%
L 2045 13.4853 0.0298 9.83%
L 2050 29.5995 0.0695 10.41%
L 2055 14.6440 0.0405 12.65%
L 2060 14.6439 0.0405 12.65%
L 2065 14.6437 0.0405 12.65%
G Fund 16.6895 0.0021 0.99%
F Fund 20.8017 0.0142 -1.40%
C Fund 68.7435 0.3248 15.90%
S Fund 87.9833 0.6274 11.66%
I Fund 39.3278 -0.0717 8.56%
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* YTD data is updated on the last day of the month.