A Perfect Retirement Storm? Comparing Pay Raise, Inflation, COLAs During Periods of High Inflation

Is 2022 a good year to retire? How do the annual pay raise, inflation, and COLAs compare during similar economic circumstances under Presidents Carter and Biden?


Recent Data for Inflation, Pay Raise, and COLAs

We cannot be certain what the pay raise will be in 2023. With President Biden issuing his “alternative pay plan” letter last week, it appears the 2023 raise will be an average of 4.6%. This is an across-the-board pay raise of 4.1% and an additional amount of 0.5% for different locality pay raise amounts throughout the country.

Inflation is at the highest it has been in 40 years. The method of calculating inflation has changed. The actual inflation rate today would probably be higher if the calculation procedures had not changed.

Inflation Under Presidents Carter and Biden

There are two presidents who were in office when inflation has soared: President Jimmy Carter and President Joseph Biden. Comparing the annual COLA rates, pay raise rates, and annual inflation in two disparate administrations about four decades apart may provide some insight into how federal employees and retirees fared in periods of high inflation.

Comparing past experience with high inflation may also give us some basis for the impact of inflation on increases in future paychecks for current federal employees and retirees.

The Carter Years

The 1975-82 COLAs were effective with Social Security benefits payable for June in each of those years; thereafter COLA benefits were payable for December. Prior to 1975, Social Security benefit increases were set by legislation.

YearPay RaiseInflationCOLA
Inflation Rate Soars to 7.5%; Comparing 45 Years of Federal Raises, Inflation, and COLAs

We have the benefit of looking at all years for the time when Jimmy Carter was president. While some of the economic aspects are quite similar, we have data for less than two years for the Biden administration.

The Biden Era: COLA and Pay Raise Projections

While we do not know the final inflation figures or COLA figures for 2022, we do have enough to estimate what the final figures may look like by the end of the year. The annual COLA increase projection for the COLA that will take effect in December 2022 (payable in January 2023) is 9.6% according to projections from the Senior Citizens League. The 2022 inflation figure below reflects the annual inflation rate as of August.

Here are the data so far in the Biden years:

YearPay RaiseInflationCOLA

As was the case during the Carter presidency, inflation, federal employee pay and COLA payments are increasing.

Inflation may be peaking with the drop in gas prices last month. In other areas, prices are still rising fast. Food prices were up another 1.1% in July—more than they went up in June. The cost of eating at home was up 13.1% in the past twelve months as of July and the CPI-W (used to calculate the annual COLA) was up 9.1% in one year.

The Federal Reserve is now starting to aggressively raise interest rates. While President Biden initially stated that inflation would be transitory, the Federal Reserve has expressed concerns about inflation becoming a longer-lasting feature in our economy. It is raising interest rates to try to slow down inflation. We will get some indication if these efforts are successful with data to be released during the remaining months of this year.

Timing of Pay Increases and Inflation

Inflation is not a friend for receiving a retirement annuity or a paycheck. As inflation goes up, purchasing power goes down. Everyone ends up spending more on gas, food, utilities, and rent or a mortgage.

The timing used in determining a pay raise or a COLA does not work out well for current federal employees or retirees. This reality may impact the financial planning of readers in the coming months.

For example, there was a 1% pay raise in 2021. By the time the pay raise kicked in, inflation was already zooming ahead of previous inflation figures. In a similar fashion, the pay raise that started in January 2022 was 2.7%. By now, inflation has gone down to an 8.5% annual rate (from 9.1% the previous month). That additional 2.7% pay raise does not look good after factoring in rapid price increases.

For current federal employees, salary increases may go up more than the inflation rate or more than the COLA. That is because current employees may receive a promotion (with a pay raise) or a within-grade increase that provides an increase in pay. Federal employees who are retired continue to receive the same income throughout the year unless they take on a new job to supplement their income.

Double Whammy of High Inflation and Falling Value of TSP Investments

2022 is not an ideal time to start a retirement future. The C Fund in the Thrift Savings Plan (TSP) is down 16.15% this year and the S Fund is down 22.14%. With stock investments down in double digits, and inflation running at 8.5% as of last month, a person’s retirement income is dwindling fast between the impact of inflation and a dwindling investment portfolio.

Negative returns on your investments just as retirement years are starting can be devastating. This is the time when an investment portfolio is usually the largest it will be if a retiree is withdrawing money for living expenses. The combination of losing money in the stock market, and withdrawals from a portfolio may leave a portfolio too low to last for a retirement that can last for decades.

Advantages of Federal Employee Retirement But Number of TSP Millionaires Dwindling

Federal employees have a big advantage in their retirement years. They have access to a low-cost investment portfolio in the TSP and an annuity that goes up in most years due to the annual COLA. They also have Social Security payments under the FERS retirement system.

But, even with these advantages, it is easy to have spending that draws down available money that may have to last 30 years or more.

The number of millionaires in the TSP has dropped by 36% since December 2021. That was as of June 30th, and the stock market has fallen since that time so the actual number of millionaires is now even smaller. At the end of June, only 1.7% of TSP investors had a million or more dollars in their TSP investment portfolio. The vast majority do not have the advantage of this financial resource.

Will Inflation Continue to Ravage Consumers?

Having a financial plan and limiting spending to fit financial resources can make the difference in having a comfortable financial future or one requiring significant financial sacrifices.

Under President Carter, high inflation continued for several years. The period of high inflation ended under President Ronald Reagan who reduced the growth of government spending, reduced income taxes and the capital gains tax, reduced government regulation, and tightened the money supply.

We do not know if raising interest rates and other actions by the federal government will significantly reduce inflation. The federal government has spent trillions of dollars in COVID relief funds and forgiving student loans. The impact of programs like these pouring large amounts of money into the economy and on the inflation rate remains to be seen.

Past experience demonstrates the strong possibility inflation will remain a big factor in our economy in the immediate future. The purchasing power of your retirement funds or your paycheck may be significant for at least another year.

Some readers think that a large COLA will be available to them in January 2023 if they retire late in 2022. That is not the case as the COLA payable is reduced for each month a federal employee continues working.

If you are planning on retiring in the near future, will you have the money available to have a comfortable retirement? The time to make that decision is before walking out the door into your retirement decades.

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