2022 COLA: 5.9%
The Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) has gone up 5.9% over the last 12 months. The reason this is of interest to many readers is that the CPI-W index is the one used to calculate the amount of the Cost of Living Adjustment (COLA) that will be reflected in Social Security and federal retiree annuity checks in January.
On an annual basis, inflation went up 5.4% based on the CPI for all urban consumers. The inflation rate is tracked by the Bureau of Labor Statistics.
Reasons Behind the Increase
An increase in the cost of gas and transportation is largely behind the high COLA for 2022. These items are weighted more heavily in the consumer price index (CPI) for calculating the COLA.
This heavier weighting benefits retired Social Security beneficiaries and federal retirees. That has not been the case over the past 12 years because the cost of gas and other falling prices lowered the COLA. Since 2010, COLAs have averaged 1.4%. No COLA was paid in 2010, 2011, and 2016 due to low inflation. In 2017 the COLA was almost zero as well (0.3%).
The annual COLA does not reflect the increasing cost of Medicare premiums or the Federal Employees Health Benefits Program (FEHB).
Inflation Impact High—Still Less than 1980’s
The last time an annual COLA was higher than the 2022 increase of 5.9% was in July 1982. There was a different COLA system used at that time. In 1982, the COLA was 7.4%. For those with an eye on history, President Carter left office in 1981. The largest COLA was in 1980 when he was still in office. In that year, the COLA hit 14.3%.
The highest COLA in recent years was in 2009 when it was 5.8%. The second-highest reading was 4.1% in 2005. The 2022 COLA now takes over the number one position for the highest COLA in recent memory.
2022 COLA Calculations for CSRS and FERS
If you are a new federal retiree or have just not paid attention to how the system works, a COLA attached to your federal pension is a significant benefit. The yearly COLA adjustment helps a person who is retired maintain their standard of living by getting a yearly boost in pension payments based on the rate of inflation.
There is a difference in the COLA calculations for those under FERS and for those under CSRS. The FERS pension COLA is based on an inflation gauge (the CPI-W). Essentially, this means that if the CPI-W shows that prices are higher, then FERS and CSRS pensions will also go up.
Social Security and CSRS pensions receive COLAs based on the rate of inflation as calculated by the CPI-W. The COLA for FERS pensions is not as generous.
If the inflation rate is less than 2% in a year, the FERS pension will get the full amount of the COLA. If inflation rises between 2% and 3%, the FERS COLA will be 2%. If inflation is up more than 2%, the FERS COLA is the inflation amount minus 1%.
In other words, when the measure of inflation is up more than 2%, a FERS pension increase will fall behind. For a person who may be retired for many years, this difference is likely to be substantial over time.
So, when inflation is above 3% using the CPI-W index, FERS pensions will lag 1% behind this inflation rate every year in which this occurs.
Why Your Retirement System Impacts Your 2022 COLA
In 2022, those retired federal employees who retired under the FERS system will receive 1% less than those under the CSRS system. While they do not receive the full COLA for their pension or annuity, they do receive the full COLA for Social Security.
CSRS was phased out starting in 1987. There are very few current federal employees who are still working under the CSRS system—less than 100,000. Of the more than 2.1 million federal retirees (including the Postal Service), 61.8 percent are drawing benefits under CSRS.
CSRS employees do not receive Social Security as part of their retirement plan. Some CSRS employees do receive Social Security based on employment other than having worked for Uncle Sam but it is not an integral part of the CSRS plan.
FERS employees also have access to invest for their future retirement through the Thrift Savings Plan (TSP) for their entire career with the federal government. The federal government provides an extra matching amount that goes into the TSP to provide a greater income stream during retirement.
The extra COLA amount for CSRS employees is the result of Congress having decided that the benefit of the TSP investments, including a matching amount provided by the federal government for an employee who invests in the TSP, and the additional income provided during retirement by the Social Security system justified a lower COLA than the one provided for CSRS employees.