Predicting the 2023 COLA and How to Avoid the Surprise of a Lower Annuity Payment

What is the latest 2023 COLA prediction? If federal employees plan to retire in 2022, will they get the 2023 COLA?

Key Takeaways

  • One estimate currently puts the 2023 COLA at 7.6%
  • Federal employees planning to retire in 2022 to take advantage of a big 2023 COLA increase may be in for an unpleasant surprise
  • How is the 2023 COLA calculated for both FERS and CSRS?

Editor’s Note: The video in this article contains charts and examples with a fuller explanation of the 2023 COLA and how it will impact some readers.

Some readers are starting to focus on the 2023 COLA and how it may impact their projected retirement income. Inflation is already having an impact on our national psyche. The question of how large the COLA will be for 2023 and how this may impact a future federal retirement is generating questions from FedSmith readers.

Last year’s full COLA of 5.9% (which started payments in January) was the largest COLA in 40 years. That 40-year record is likely to be wiped out by the 2023 cost of living adjustment (COLA).

The last time the annual COLA was higher than it was in 2022 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%.

If you remember listening to songs on your FM car radio like “Hurts So Good” (John Mellencamp); “Love’s Been a Little Bit Hard on Me” (Juice Newton); or “Eye of the Tiger” (Survivor) you probably were not paying much attention to the rate of inflation. These were some of the hit songs in July 1982. On the other hand, you are probably at or very close to retirement age now and, and unlike your interests in 1982, the annual COLA watch may now be of more interest.

One 2023 COLA Prediction: 7.6%

Last year, as FedSmith reported in June, the Senior Citizens League projected a COLA of 5.3 percent. That turned out to be lower than the actual COLA figure of 5.9% because inflation continued to increase. The COLA prediction for 2023 could also turn out to be too low as inflation is still raging and still increasing.

For 2023, the non-partisan Senior Citizens League has now released a 2023 COLA estimate of 7.6%.

Obviously, this figure can change. If inflation continues unabated, President Biden may have a long-lasting reputation of being president when the rate of inflation matched the rate that occurred under President Carter more than 40 years ago. The administration and the Federal Reserve will work hard to prevent that from happening and interest rates are already rising as part of this effort.

But, for readers collecting Social Security and/or a federal annuity, keeping up with the annual COLA estimates has a financial impact that makes it worth paying attention to.

How Will Your 2023 COLA Increase Be Calculated?

Here is how the COLA calculation works:

  • Consumer Price Index (CPI-W) readings are taken from the third quarter (July – September) of the current year.
  • These data are compared to the average CPI-W reading from the third quarter of the previous year (2021).
  • The average reading from the third quarter of the current year (2022) is compared to the figure from the third quarter of 2021.
  • If the average CPI-W reading goes up in 2022, then the difference, rounded to the nearest 0.1%, is what beneficiaries will receive as an increase in 2022.
  • If the figure is lower— indicating deflation—no adjustment is made. That happened several times under the Obama administration.
  • The possibility of no COLA increase in 2023 is highly unlikely. The question is how much will inflation increase and what will the final COLA calculation be.

The COLA calculations are different for those under FERS and for those under CSRS.

Calculating the COLA for FERS

  • For Federal Employees Retirement System (FERS) or FERS Special benefits, if the increase in the CPI is 2 percent or less, the Cost-of-Living Adjustment (COLA) is equal to the CPI increase. 
  • If the CPI increase is more than 2 percent but no more than 3 percent, the Cost-of-Living Adjustment is 2 percent. 
  • If the CPI increase is more than 3 percent, the adjustment is 1 percent less than the CPI increase. The new amount is rounded down to the next whole dollar. 
  • To get the full COLA, a retiree or survivor annuitant must have been in receipt of payment for a full year. 
  • If a person has not received the payment for a full year, the increase is prorated under both plans. Prorated accounts receive one-twelfth of the increase for each month they received benefits. Cost-of-Living Adjustments were first prorated in April 1982. 
  • Adjustments to benefits for children are never prorated. 
  • Federal Employees Retirement System (FERS) and FERS Special Cost-of-Living Adjustments are not provided until age 62, except for disability, survivor benefits, and other special provision retirements. 
  • FERS disability retirees get the adjustment, except when they are receiving a disability annuity based on 60 percent of their high-3 average salary. 
  • Also, under FERS, if you have a CSRS component, the component is subject to the CSRS COLA calculation.

Calculating the COLA for CSRS

For Civil Service Retirement System (CSRS) benefits, the percentage increase is applied to your monthly benefit amount before any deductions are withheld. The payment is rounded down to the next whole dollar. 

Of course, there are some exceptions to these calculations. As noted by the Office of Personnel Management (OPM): “A benefit will not be increased if it would cause the annuitant to receive payments in excess of any cap amount specified by law.”

Bottom Line on Calculating the 2023 COLA

For those who were asking how they can determine their 2023 COLA, your answer will depend on several variables, including which retirement system applies to you, how many months you started to receive your retirement payment in the past year, whether the FERS special benefits apply to you, your age, etc.

Be sure to check out our video explaining the COLA calculation process in greater detail, and if you need help with your personal situation, check with your agency’s human resources office and/or a financial advisor who specializes in working with federal employees for assistance.

How Will the 2023 COLA Impact Your Annuity For Those Retiring in 2022?

Readers have posted a variety of questions concerning retirement and the 2023 COLA. For example, some readers are wondering if they should retire in December—just in time to take advantage of the 2023 COLA. Others wonder if they should wait and see how much the COLA is and what the annual pay raise will be and then decide based on which will provide the largest payment.

Some readers will be disappointed. Here is why:

  • To receive the full COLA, you must have been receiving an annuity payment for a full year.
  • If a person has not been retired for a full year, the COLA payment will be pro-rated.
  • Pro-rated amounts are 1/12th for each month a retiree has received an annuity payment.

In other words, if you are planning on retiring in November to receive the full COLA for 2023, you will be disappointed. You may receive a very small amount of the annual COLA adjustment in your annuity check if you have not been receiving annuity payments for a full year.

Also, remember that your retirement annuity is based on your “high-3” years of your federal salary. The 2023 federal pay raise will most likely start with the January 2023 salary check. A higher salary will be paid out to current federal employees one month at a time. The final 2023 federal pay raise figure and corresponding 2023 GS pay tables (General Schedule) will not be announced until late this year, usually in mid to late December.

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