Your 2022 Federal Pay Raise, COLA, and Why 2021 Inflation Is Important

The 2021 inflation rate so far is now 6.2%. With a projected 2022 federal pay raise of 2.7%, and a COLA of 5.9%, purchasing power is declining fast.

2022 Federal Pay Raise and COLA Percentages for 2022

We know the cost of living adjustment (COLA) in January 2022 will be 5.9%. This is the highest COLA increase in almost 40 years. That increase is as large as it is just because of how fast inflation was creeping up through September due to how the annual increase is calculated.

We are not certain what the average 2022 federal pay raise will be in January. At the moment, it appears likely the 2022 federal pay raise will average 2.7% as President Biden has issued his “alternative pay letter” stating this amount and Congress has not been inclined to legislate a different percentage.

There will be legislation emanating from Congress this year and much of this legislation will be on financial issues. With the 2021 inflation rate going higher, it is possible the expected 2.7% average pay raise may go up or any changes may just get lost in the shuffle.

While all readers are likely looking forward to a 2022 pay raise in whatever form it takes, the actual change to your economic security may be a loss of purchasing power despite receiving more money each month.

3.2% Differential in 2022 Federal Pay Raise and COLA Percentage

There are years when the raise is higher than a COLA. In other years, the COLA is higher. If current projections remain, the differential between the two programs in 2022 will be 3.2%. Has there ever been a year when the difference between the two amounts is this high?

It has happened before.

For those who have been federal employees for a few years, you may recall that from 2010-2016, the annual federal pay raise was very low. In 2012, there was not a federal employee pay raise. But, in that same year, the COLA amount was 3.6%. Here are the actual figures:

YearPay Raise PercentageCOLA Percentage
201020
201100
201203.6
201301.7
201411.5
201511.7
20161.30

There were two years (2010 and 2011) without a COLA increase. This had never happened since the automatic increase formula for Social Security was established in 1975. Prior to these two years of no increase in the annual COLA, the lowest annual adjustment was 1.3% in 1998. The reason for the lack of any increase for two years was because inflation was very low. (Also see Why Your Costs May Be Up But Your Retirement Income Goes Down)

For those with a personal interest in the subject, pay raises under Republican presidents have been higher than under Democrats (See 50 Years of Federal Pay: Democrats v. Republicans)

For the 52-year period from 1970-2021, the federal workforce has had higher pay raises during a Republican administration. Here is the differential:

  • The average pay raise per year: 3.71%
  • Under Republicans: 4.05%
  • Under Democrats: 3.65%

2021 Inflation Rate and Its Impact on the Pay Raise & COLA

The reason for the differential is simple: Inflation is going higher and the COLA increase is tied to inflation. The pay raise is not directly impacted by inflation as it is more of a political decision.

According to the Bureau of Labor Statistics, at the end of October, the annual inflation rate was 6.2%. In one month, the gasoline index went up 6.1% and the food index was up 0.9%. While inflation is still going higher, the COLA for 2022 has already been set.

The rising inflation rate has led to comparisons between inflation under the Carter administration to the Biden administration. Under President Carter, inflation rose by an average of more than 11% in 1979 and almost 14% in 1980. The most recent inflation rate is not that high. Five consecutive months of inflation above 5%, including 6.2% in October, is not a reassuring trend in comparison to the typical rate of 2%.

No one knows if the increasing rate of inflation will suddenly go down or continue to go up. The Biden administration says the inflation is just “transitory” and will go away in 2022. That would be good news but may also be wishful thinking or coming from politicians who want to stay in office. According to Joe Manchin (D-WV):

By all accounts, the threat posed by record inflation to the American people is not “transitory” and is instead getting worse. From the grocery store to the gas pump, Americans know the inflation tax is real and DC can no longer ignore the economic pain Americans feel every day.

Since the start of COVID, Congress has authorized $6 trillion through the American Rescue Plan, the Coronavirus Aid, Relief, and Economic Security (CARES) Act, and other legislation. The Federal Reserve has also purchased over $4 trillion of new assets to put more money into the market. Federal debt is now currently equal to the size of the economy, standing at almost 100 percent of our gross domestic product.

Politics aside, this amount of money is a huge monetary stimulus unlikely to help in curbing inflation. An increasing inflation rate will dilute the impact of a pay raise or a COLA increase.

Diluting the Impact of the 2022 Federal Pay Raise & COLA

Current federal employees may actually get a higher check if a person receives a promotion or a within-grade increase. That will help those fortunate enough to increase their income in this way. Those who are retired are more likely to be living on an income that increases with an annual COLA.

No doubt, the COLA increases help. For those that think a COLA will retain purchasing power, that may be a mirage, even with relatively low inflation. The Senior Citizens League estimates that the average Social Security benefit has lost about a third of purchasing power since 2000. COLA’s have not kept up with more expensive prescription drugs, food, and housing. 

Some federal employees have an advantage of possible promotions or at least a within-grade pay increase (WIG) coming up. We know that the average federal employee pay went up despite a pay freeze during the Obama administration and that was in a period of very low inflation.

2021 is a good time for anyone who is out of work and wants a job because there is a labor shortage. For those who are seeking a better-paying job, this may be a good time to be in the labor market.

Ending A Strange Year—and Looking to the Future

2021 has been a strange year. The stock market is setting records, the COVID pandemic has disrupted the lives of all Americans, labor and supply shortages are rampant and impacting availability of goods and services, a vaccination mandate emanating from the White House for most of the country is creating even more political division and unrest, and, on top of everything, inflation is rising rapidly. No doubt, there is a lot of uncertainty and apprehension about the impact of the economy on our lives going forward.

There are now more than 100 million people who do not count in calculating the unemployment rate as they are not looking for work. Some are retired, some are probably afraid of COVID, some are disabled, and some are getting by on other sources of money—including various forms of government payments—without having to work.

Readers frequently comment that they could make a higher salary in the private sector. No doubt, that is true in some professions. The federal government has many advantages as an employer—the benefits are good and there is a high average salary and the average is going up.

At the end of June 2021, the average federal employee salary, according to the Office of Personnel Management, was $91,645. At the end of June 2020, the average federal salary was $90,123—$1,522 less than in 2021. This was an increase of about 1.68%. The federal pay raise that became effective in January was an average of 1%.

Some federal employees are likely to look for employment outside of the federal government for a better-paying job.

There are also many employees who are retiring. In September, the retirement backlog at the Office of Personnel Management reached a peak not seen in 8 years. In 2020, an average of 7,674 retirement claims were filed each month. In 2021, as of October, there is an average of 8886 claims filed each month and there are still two very busy months to go in the year.

The table below shows the average number of new retirement claims submitted each month from January – October and the total number of new retirement claims OPM received in the same time period for each of the years shown.

YearAverage New ClaimsTotal Claims
20218,88688,864
20208,10781,077
20198,85588,553
20189,43294,320
20178,47884,783

The federal workforce is going through a stressful time as many companies are. We do not know what these changes will bring moving forward. In many years, private sector salaries go up more than in the private sector, on average. One report in 2015 described the federal government as “an elite island of secure and high-paid employment, separated from the ocean of average Americans competing in the economy.

More recently, according to the Bureau of Labor Statistics, wages and salaries increased 4.2 percent for the 12-month period ending in September 2021 and 2.5 percent for the 12-month period ending in September 2020.

Obviously, comparing private sector employment to the federal sector is complex and there are advantages to both. It is likely more people will leave for a variety of reasons if salaries in the most successful private companies go up faster than the federal government as private sector employment may look more attractive.

About the Author

Ralph Smith has several decades of experience working with federal human resources issues. He has written extensively on a full range of human resources topics in books and newsletters and is a co-founder of two companies and several newsletters on federal human resources. Follow Ralph on Twitter: @RalphSmith47