Can the federal government authorize spending trillions of dollars and incur a huge debt increase as the country opens up after a pandemic without creating an inflationary cycle?
We are about to find out later this year. The answer to that question will impact the value of your Thrift Savings Plan (TSP) as well as the amount in the cost of living adjustment (COLA) federal retirees and Social Security recipients will receive starting in January 2022.
As noted below, one expert projects a 2022 COLA increase of 4.7%. For 2021, it was 1.3%.
Largest Increase in Inflation Since 2008
The initial indications are not reassuring. American consumer prices went up significantly in April as the economic recovery picked up, reflecting surging demand as the COVID pandemic eased and higher prices due to supply bottlenecks.
According to the Bureau of Labor Statistics (BLS), the consumer-price index jumped 4.2% in April from one year earlier. This is an increase from 2.6% for the year ended in March. That is the highest 12-month level since the summer of 2008.
For those who keep track of data such as this, the COLA increase in 2008 was 5.8%.
The annual COLA increase is based on an index referred to as the CPI-W. The CPI-W is the inflation index used for measuring increases in the prices of consumer goods, including food and beverages, housing, clothing, transportation, medical care, recreation, education, and communication, among others. The annual increase is calculated by the Bureau of Labor Statistics.
According to BLS, the index for Urban Wage Earners and Clerical Workers (CPI-W) increased 4.7 percent over the last 12 months. For the month of April, the index rose 0.9 percent.
No one knows, of course, what the final COLA increase will be in January. But, unlike some years in the recent past, there is no doubt there will be an increase in payments to federal retirees and Social Security recipients.
No doubt, some will take a look at the latest inflation figures and be happy they will get an increase in their annuity payments in 2022. That is largely a false feeling of euphoria though.
Prices of some products have gone up more than 10% recently. The BLS data on inflation do not include food and energy prices because they are more volatile. That means that the actual increase in what a retiree is paying for items such as food and gas may be going up much faster than the COLA increase.
In other words, the COLA increase will not increase a retiree’s standard of living. The increases consumers will be paying for all goods and services, including the increased cost in food and gas, are likely to be higher than the 2022 increase.
The Senior Citizens League has concluded Social Security benefits have lost 30% of their buying power since 2000. This means that for every $100 worth of groceries retirees could buy in 2000, they can only buy $70 worth today.
4.7% COLA Increase in 2022?
As noted above, the COLA increase for 2022 is tracking to be the largest increase since 2008 when it rose 5.8%.
Mary Johnson, Social Security analyst for the Senior Citizens League, projects the COLA payments could increase by 4.7% in 2022.
When Will Retirees Know the 2022 COLA?
We will not know the amount of the 2022 increase until mid-October. The system for calculating the COLA increase is based on the average of the months of July, August, and September using BLS data. The COLA calculation uses the CPI-W from the Bureau of Labor Statistics (BLS) to calculate your COLA for the next year.
While inflation has been starting out on steroids so far in 2022, this is a volatile time. Some analysts project inflation will start to recede later this year.
For reference, here are the COLA increases over the past few years going back to 2008 when the largest increase went into effect:
- 2021: 1.3%
- 2020: 1.6%
- 2019: 2.8%
- 2018: 2.0%
- 2017: 0.3%
- 2016: 0%
- 2015: 1.7%
- 2014: 1.5%
- 2013: 1.7%
- 2012: 3.6%
- 2011: 0%
- 2010: 0%
- 2009: 5.8%