2023 COLA Finalized at 8.7%
The annual COLA (cost of living adjustment) is automatically calculated using the federal government’s inflation data as calculated by the Bureau of Labor Statistics (BLS).
Inflation has been soaring in 2022 and is one of the most critical issues concerning Americans today. Those who are retired or close to retiring often watch the monthly inflation data because it impacts the annual COLA adjustment for federal retirees and Social Security payments. Recipients will see the new payments starting in January.
The CPI-W is the index used to calculate the amount of the increase automatically. The final piece of the data puzzle was released today, October 13, 2022.
2023 COLA Largest Since 1981
According to BLS in its latest 2022 inflation update, inflation was up 0.4% in September based on the Consumer Price Index for all Urban Consumers (CPI-U). Over the last 12 months, according to BLS, the all-items index (a different index than the CPI-U) increased 8.2%.
Last October, when the COLA for 2022 was announced, federal retirees received a 5.9% increase for Civil Service Retirement System (CSRS) annuities and Social Security benefits and a 4.9% increase for Federal Employees Retirement System (FERS) annuities starting in January 2022. At that time, this was the largest COLA increase in 40 years.
The Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) is the index calculated by BLS that is of most interest to many FedSmith readers. This index increased 8.5% in the last 12 months.
The CPI-W is the index of most interest for those who are retired and who receive a federal employee annuity payment. It also is the amount used to calculate the COLA for Social Security payments in 2023.
It is now at an index level of 291.854.
The CPI third quarter average for 2021 was 268.421. This is significant because the annual COLA is calculated by comparing the change in the CPI-W from year to year, based on the average of the third-quarter months of July, August, and September. This means that the increase over the third quarter average last year is 8.7%.
The largest COLA increase in the past few decades was in 1980 when it was 14.3%. The 2023 COLA increase will be the largest COLA payment since 1981 when it was 11.2%.
In 1981, inflation was at 10.3% and the annual COLA was 11.2%, obviously higher than the figures released today. But, in fairness to former President Carter who was blamed for much of the persistent inflation during that era, and who was defeated in seeking a second presidential term in large part due to inflation, the method of calculating inflation has changed.
The current trend in inflation may actually be higher than it was during the Carter years if the way it was calculated had remained consistent. Generally, the changes in inflation calculations have depressed reported inflation. The newer method changed the concept of the CPI away from measuring the cost of living needed to maintain a constant standard of living. The newer method of calculation measures the cost-of-living expenses rather than the rise in prices.
According to one source that tracks this information, the current inflation rate would be about 17% had the earlier calculation method been used.
Disappointed in COLA Increase?
Inflation has been persistently high in 2022. Some who are retired may be disappointed to see downward revisions to their 2023 COLA forecasts as earlier estimates in 2022 were 11% or higher. But there is a silver lining buried in that bad news.
COLAs do not fully compensate for inflation. The result is that over time, the purchasing power of the income of a retired person goes down. The buying power of Social Security benefits has fallen more than 40% since 2000.
Retired people are better off financially with lower inflation and smaller COLAs. Because COLAs do not fully replace the lost purchasing power of retirement income, lower inflation and lower COLAs usually do a better job of preserving the purchasing power of someone who is retired. While large COLA payments made in response to high inflation provide more dollars, each dollar actually buys less than these dollars did in previous years. With that in mind, seniors probably should view falling COLA forecasts as good news.
Why Your Retirement System Impacts Your 2023 COLA
In 2023, those retired federal employees who retired under the FERS system will receive 1% less than those under the CSRS system. While they do not receive the full COLA for their pension or annuity, they do receive the full COLA for Social Security.
CSRS was phased out starting in 1987. There are very few current federal employees who are still working under the CSRS system—less than 100,000. Most federal retirees are drawing benefits under CSRS.
CSRS employees do not receive Social Security as part of their retirement plan. Some CSRS employees do receive Social Security based on employment other than having worked for Uncle Sam but it is not an integral part of the CSRS plan.
FERS employees also have access to invest for their future retirement through the Thrift Savings Plan (TSP) for their entire career with the federal government. The federal government provides an extra matching amount that goes into the TSP to provide a greater income stream during retirement.
The extra COLA amount for CSRS employees is the result of Congress concluding the benefit of the TSP investments, including a matching amount provided by the federal government for an employee who invests in the TSP, and the additional income provided during retirement by the Social Security system justified a lower COLA than the one provided for CSRS employees.