The rapid rise in 2022 inflation is leading to even higher predictions of what the 2023 COLA will be for Social Security recipients and retired federal employees.
Social Security recipients and retired federal employees receiving an annuity received the highest cost of living adjustment (COLA) in 40 years starting in January 2022. The 2022 COLA increase was 5.9%.
Reality Bites: 2023 COLA Projection Now 8.9%
Once inflation starts it does not go away quickly. Calling it “transitory inflation” sounds good coming from politicians who do not want to lose your vote in the next election and hope you do not want their policies to be seen as the reason for the rapid rise in prices. The reality of economics will inevitably overcome the short-lived “feel-good” political rhetoric.
Reality is now hitting home. The inflation that started hitting Americans in their wallets and purses in 2022 has outlived the political rhetoric.
As FedSmith readers know, the actual COLA calculation will not be finalized until the consumer price index data from July-September are calculated and will be announced in mid-October.
But, based on the inflation figures through March of this year, the Senior Citizens League now estimates that the 2023 COLA will come in at 8.9%.
Last month, the COLA projection was “only” 7.6%. The reason for the change is the rapid increase in inflation in the month of March.
In effect, the projection is an estimate based on the latest data. The actual increase could be lower before the COLA calculations are finalized for 2023. The actual COLA could also be higher than is now projected.
Comparing 2023 COLA to Previous Years
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%.
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%. It is unlikely the 2023 COLA will get up to 14.3%.
On the other hand, the method of calculating the inflation rate has changed since the early ’80’s. Chances are, inflation will be increasing at about the same rate as it did then but the different calculations impact the yearly increase. (See Why Your Raise or Annuity Goes Down Faster Than Inflation Goes Up)
The 2023 COLA And How It May Impact 2022 Retirees
Readers have posted questions concerning how the 2023 COLA will or should impact their personal retirement decision. Most of the folks asking questions are wondering if it would be more financially advantageous to take advantage of the COLA which could be 8% (or more) and retire in 2022 because the annual pay raise is likely to be much less than that.
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.
On its face, that question makes sense, but reality is different. The COLA adjustment does not work in the way some people think it works.
If this is the basis for your retirement decision you 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 not be receiving the full amount of the COLA.
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.
Video Explaining the COLA Calculation Process
Be sure to check out the FedSmith video explaining the COLA calculation process in greater detail. If you need help with your personal situation and making a retirement decision, check with your agency’s human resources office and/or a financial advisor who specializes in working with federal employees for assistance.