High Inflation and A Bear Market: Will “Double Whammy” Impact 4.6% Proposed Pay Raise?

Two of the TSP stock funds are now in bear market territory and inflation is raging. What does history show about a federal pay raise during high inflation?

Impact of Bear Market on TSP Stock Funds

The descent of the Thrift Savings Plan (TSP) stock funds into bear market territory has been several months in the making. While the bear was getting close, after the large drop in stock values on June 13, the bell has rung and the bear has now hit the assets of TSP investors as stock market investors worry about a coming recession.

A bear market is a drop of 20% or more from a recent high. The C Fund is the most widely held TSP stock fund which tracks the S&P 500 index. On January 3, 2022, the price for one share of the C Fund was $72.4061. At the close of the market on June 13, the price of one C Fund share was $56.9910—a drop of a little more than 21%.

21% seems like an abstract figure. Putting this into dollar terms, a TSP investor holding 10,000 shares of the C Fund at the beginning of this year had a value of $723,656. Today, the value of those same 10,000 shares would be about $569,910—a loss of $153,746 so far this year. To me, a loss of $153,746 just sounds like more money than a loss of 21%.

As of December 31, 2021, there were 219,658 TSP investors with TSP assets in the range of $500,000 – $749,000 and there were 112,880 TSP millionaires. These are most likely the investors who have experienced the largest drop in dollar value. We will find out next month how many millionaires there are based on the stock market’s performance so far in 2022. It is likely the number will be considerably smaller.

How All TSP Funds Have Fared in June and Year-to-Date

S Fund Down 28.07%

Here is how all of the TSP Funds have fared so far this year and so far in June.

The S Fund is an index fund of smaller companies. This Fund will sometimes rise faster than any other Fund in a bull market. The downside is that it can, and does, often go down more than other Funds in a bear market. So far this year, the S Fund is down 28.07%—well into bear market territory.

G Fund0.15%1.01%
F Fund-3.86%-11.84%
C Fund-7.52%-20.79%
S Fund-8.14%-28.07%
I Fund-8.04%-18.79%
L Income-1.96%-5.18%
L 2025-3.41%-9.38%
L 2030-4.86%-13.33%
L 2035-5.35%-14.68%
L 2040-5.83%-15.96%
L 2045-6.24%-17.11%
L 2050-6.63%-18.15%
L 2055-7.72%-20.94%
L 2060-7.72%-20.95%
L 2065-7.73%-20.96%
Source: TSPDataCenter.com

Double Whammy of Inflation and Falling Stock Values

A period of high inflation and falling stock prices is what I call a “double whammy” because current federal employees are feeling the effect of both issues.

The impact of an average wage increase of 2.7% for federal employees that was effective in January has long been decimated by an inflation rate of 8.6%. In reality, the actual rate of inflation for items that are in general use has been much higher.

Former federal employees who are now retired received a COLA of 5.9% (4.9% for FERS). People who are retired will often feel the impact of inflation even more than those currently employed as they do not receive within-grade increases or promotions. Some take on other jobs as their purchasing power diminishes.

Comparing CPI Rate of Inflation Today and in 1980

In other words, inflation would be above 17% today, if this calculation is reasonably accurate, if inflation were still calculated as it was more than 40 years ago (1980).

Under President Carter, inflation reached a high of about 14%. Inflation played a large role in his political future. No doubt, the impact of high inflation and falling stock prices are still a politically volatile combination.

We now often see headlines that state inflation is the highest it has been in 40 years and with a notation that President Carter was subsequently voted out of office. But, during a period of high inflation, federal employee pay raises were higher than in recent years.

Inflation and History of Federal a Pay Raise

Inflation was high during the Carter administration and federal employee raises were higher. The raise in 1981 was 4.8%.

In 1980, the federal pay raise was 9.1%. Inflation in those two years was above 10% in both years. While we are getting close, or already above that if one chooses to ignore the official calculation method of inflation now in use, there is no way of knowing if inflation will again hit 10%.

We also do not know what the 2023 federal pay raise will be when the political process is completed, but it is now within the realm of possible discussion that continuing high inflation would have an impact on whatever the raise turns out to be in 2023.

Currently, the federal pay raise proposed by the White House Budget is 4.6%. One bill has been introduced in Congress to provide federal employees with a raise of 5.1% in 2023. The budget proposal of 4.6% would still be below the likely annual increase in inflation, but it would be the highest pay raise for federal employees since 2002 when it was also 4.6%. The pay raise was 4.8% in 2000 under President Clinton.

While other presidents served more years in office, no other president provided total raises as high as federal employees enjoyed under President Nixon. During the Nixon administration (his presidency was from January 20, 1969 – to August 9, 1974), the average yearly pay raise was 6.64%. In fact, the total federal pay raise during the five years of the Nixon administration was 33.20%.

The second-highest average was under President Carter. During President Carter’s time in office (his term was from January 20, 1977 – to January 20, 1981), federal employees received an average increase of 6.60%. President Carter was in office for four years. Federal employee annual raises under his administration totaled 26.40%.

So, history shows that there has been a bigger pay raise when inflation is higher although it may be a year after the highest rate of inflation. Few federal employees now working (if any) were employed by Uncle Sam during the Nixon Administration and not many were employed during the Carter Administration. We have been through years of very low inflation. But, if history is still a guide—as it often is—federal employees may receive larger pay raises during high inflation periods even though actual purchasing power may decrease.

High inflation and a falling stock market are an awful combination for most Americans. The Federal Reserve is about to raise interest rates and that may tame inflation. This could tame inflation and also bring on a recession in the economy. As a result, many Americans are on edge during this turbulent economic time.

Perhaps a higher pay raise than what has been currently proposed will also result based on an economic and political climate that now feels comparable to the 1980 time period.

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