What if your next pay raise is a retiree COLA?

Most years, the size of the federal pay raise and the retiree inflation catchup are important to millions of active and retired feds. And, in the big picture, even more important to the communities where they live, vote, buy groceries and raise kids. That’s why President Joe Biden made a special point in his State of the Union address to say that teleworking feds would soon, as in very soon, be coming back to their offices.

And while the raises and COLAs are important to individuals, the community and the nation, the actual amounts are often a mystery to both workers and retirees. Especially when the amounts vary greatly. But because of the system, the way those amounts are determined make them mostly of academic interest to both groups. You get what you get. Period!

Retirees get a cost of living adjustment based on the cost of living as measured by the Bureau of Labor Statistics. Any base raise for active duty feds is based on fiscal and political considerations, not the rate of inflation. The President can earmark some of the raise to locality pay, which is why feds in New York City, Houston, Los Angeles make more than those doing the same civil service jobs in Louisville and Boise. Retirees often get COLAs even if federal pay raises are frozen as they were in 2011, 2012 and 2013.

This year, federal workers got a 2.7% pay raise. Retired feds got a cost of living adjustment of 5.9% or 4.9%, depending on whether they are under the old civil service retirement system or newer federal employee retirement system.  President Biden has proposed a 4.6% raise for feds in January, 2023. The retiree COLA won’t be determined until September living cost data has been analyzed. But given how things have changed in less than a year, the 2023 COLA could be a whopper.

In normal times, the raise vs. COLA is mostly academic for the recipients. The group that gets the smallest percentage increase is disappointed. And life goes on. But the key phrase is “normal times.” Which these definitely are not.

We’ve got a land war in the middle of Europe. Between one and two million refugees — mostly women and children — have fled to half a dozen countries, from Georgia and Germany to the U.S. and Canada. The action in Ukraine has moved to within 11 miles of Poland. Poland is a member of NATO (as is the U.S.) whose members have sworn that an attack on one country equals an attack on all. Millions of Americans believe the last election was stolen at the highest levels. Many are waiting to see what happens as unpopular mask mandates are eliminated. This week we learned that former President Barack Obama has tested positive for COVID. And what, if anything, will be the impact of the first large-scale parties — from Mardi Gras to the Florida beaches — in several years as attendees fly back to their home towns and campuses?

It appears that $4/gallon gasoline is fast becoming $5/gallon gasoline. Unless you live in California which, as always, is ahead of us. Sort of! Then what? At what point might the back-to-the-office movement run out of gas — literally? The current supply chain problem could get worse before it gets better. And new trade restrictions all have impacts on “the economy,” which is remote to most. But also to your biweekly pay and monthly annuity, which is real.

If the difference between a COLA and a pay raise becomes significant, will that finally trigger the giant tidal wave of retirements? Its been predicted since the late 1990s but hasn’t happened. So far. But hundreds of thousands of working feds are now eligible (many more than eligible) to retire. They need to figure out if they would be financially okay if they retired an depended on diet COLAs in a time of inflation. That means checking the status of their Thrift Savings Plan account and what, if anything, to do with its allocation given world economic conditions. Or would they be better off earning a steady paycheck, depending on (possibly) smaller pay raises while raising their eventual starting annuity thousands of dollars a year? That’s an individual decision, and one we will tackle Wednesday on our Your Turn radio show. Financial planner Arthur Stein will talk about how to cover your assets during troubled times.

For the official explanation on COLAs v. pay raises, check out this Congressional Research Service report from 2021.

Nearly Useless Factoid

By David Thornton

Source: Science.org

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