- 2023 Pay Raise and 2023 COLA
- Impact of Larger COLA on Retiree Taxes
- Differential Between 2023 Pay Raise and 2023 COLA
- 2022 Inflation, Impact on the Pay Raise & COLA, and the CPI-E is Inverted
- Comparing 2022 to Previous Periods of Inflation
- President Biden Tries to Reassure Americans About Inflation
- Diluting the Impact of the 2023 Pay Raise & COLA
- Ending A Strange Year—and Looking to the Future
2023 Pay Raise and 2023 COLA
In 2022, the COLA was 5.9%. The 2022 COLA increase was the highest in about 40 years. The 8.7% 2023 COLA is the highest since 1981 when it was 11.2%.
We are not certain what the average federal pay raise will be in January. As of now, it is likely the 2023 federal pay raise will average 4.6% as President Biden has issued his “alternative pay letter” with this amount. So far, Congress has not been inclined to legislate a different percentage. The same scenario transpired last year, and the result was a 2.7% pay raise in January, the same amount in the president’s alternative pay raise letter.
While all FedSmith readers are likely looking forward to a 2023 pay raise or a COLA, the actual change in your economic security is a continued loss of purchasing power despite receiving more money each month.
Impact of Larger COLA on Retiree Taxes
The average federal employee salary at the end of June 2022 was $95,241. While that is quite a bit higher than it is for most Americans, employees in some locality pay areas have a much higher average salary.
For example, in the District of Columbia, the average salary at the end of June 2022 was $133,039. While the Office of Personnel Management (OPM) does not provide average annual salaries in each locality pay area, it is reasonable to assume that other large metropolitan areas also have higher average salaries because of locality pay.
While the 8.7% COLA is good news for most retirees, some retired federal employees could find bigger Social Security checks and an increase in pension income under the federal retirement may come with a bigger tax bill. Any retirees already paying tax on their Social Security income may owe taxes on a higher percentage of those benefits next year.
Differential Between 2023 Pay Raise and 2023 COLA
There are years when the raise is higher than a COLA. In other years, the COLA is higher. If current projections remain, the differential between the two programs in 2022 will be 4.1%. Last year, the difference was “only” 3.2%. Have there ever been years when the difference between the two amounts is this high?
Going back to 1975, the differential between the 2023 COLA and the projected pay raise has been as high as it appears will happen in 2023 on one occasion. That was in 1979. In 1979, the annual COLA was 14.3% and the pay raise was 7%—a differential of 7.3%. The average monthly inflation rate that year was 11.3%.
In more recent years, inflation has been very low. As a result, from 2010-2016, the annual COLA was very low. In 2012, there was not a federal employee pay raise. But, in that same year, the COLA amount was 3.6%. (Editor’s note: SSA reports the annual COLA as being in the year it is calculated. To make an equal year-to-year comparison, we have calculated these percentages to January of the following year after the COLA is calculated to compare the same year COLA payments begin and the year in which the annual raise is effective.)
|Year||Pay Raise Percentage||COLA Percentage|
There were three years (2010, 2011, 2016) without a COLA increase. The reason for the lack of any increase was because of low inflation. (Also see Why Your Costs May Be Up But Your Retirement Income Goes Down)
2022 Inflation, Impact on the Pay Raise & COLA, and the CPI-E is Inverted
The reason for the differential is simple: Inflation is going higher and the COLA increase is tied to inflation. The pay raise is not directly impacted by inflation as it is more of a political decision.
According to the Bureau of Labor Statistics, at the end of October, the annual inflation rate was 8.2%. In one year, food at home has gone up 11.2%, electricity is up 15.5%, and gas is up by 18%. 30-year mortgage refinance rates are now above 7% although rates for lower terms are still at 6%.
And, while inflation is still going higher, the COLA for 2023 has already been set. As of October 2022, we have had 13 straight months of inflation exceeding 6%.
Some have argued that switching to the CPI-E for calculating the annual COLA would provide a higher amount to federal employees and Social Security recipients. While that is true in many years, it would not be the case in 2023.
The relationship between the CPI-E and the CPI-W has recently inverted. For 2023, the COLA will be 8.7%, higher than the 8% rise in the CPI-E. Last year the COLA was 5.9%, ahead of the 4.8% rise in the CPI-E. “Had you switched to the CPI-E a couple of years ago, retirees would be slightly worse off today,” said Andrew Biggs, a former official at the Social Security Administration as quoted in the WSJ. This may be a temporary aberration but the CPI-E would not have benefitted COLA recipients in these two years.
Comparing 2022 to Previous Periods of Inflation
The current rising inflation rate leads to comparisons between inflation now and in a similar inflationary cycle under the Carter administration. Under President Carter, inflation rose by an average of more than 11% in 1979 and almost 14% in 1980. The most recent inflation rate is still not that high although the method of calculating inflation has changed since the Carter administration. We have now had 17 consecutive months of inflation above 5%, including 8.2% in October.
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. In other words, if your family eats more chicken now and less steak, your cost of living may have remained the same despite switching to a lower-cost food item.
No one knows if the increasing rate of inflation will suddenly go down or continue to go up. The Biden administration has said in the past that the current bout of inflation is “transitory” and will go away in 2022. That would be good news but it no longer reflects the reality of inflation.
President Biden Tries to Reassure Americans About Inflation
President tried to reassure Americans (see the linked video) recently, noting that “our economy is strong as hell” and that he is “concerned about the rest of the world” as inflation is lower here than anywhere else.
It is not clear what President meant or the data upon which he is relying. The reality is that the U.S. has a higher inflation rate than our economic peers. Among the G-7 nations, Germany’s most recent inflation rate was 7.9%, the United Kingdom’s was 7.8%, Italy’s and Canada’s were 6.8%, and France’s was 5.2%. The chart at the linked article shows countries with a higher or lower inflation rate than that of the United States.
Since the start of COVID, Congress has authorized $6 trillion through the American Rescue Plan, the Coronavirus Aid, Relief, and Economic Security (CARES) Act, and other legislation. The Federal Reserve has also purchased over $4 trillion of new assets to put more money into the market. Federal debt is now about $31 trillion, currently equal to the size of the economy, standing at almost 100 percent of our gross domestic product. As noted in the Wall Street Journal recently:
The gross interest expense on the national debt hit $88 billion in August, according to the Monthly Treasury Statement. That’s $1.06 trillion a year. Interest on the national debt is exploding and heading toward what economists refer to as a “doom loop”—the vicious circle in which the government’s borrowing to pay interest generates yet more interest and yet more borrowing…. It’s highly likely that gross interest expense will rise well above $1 trillion a year and surpass Social Security as the largest item in the federal budget.
Diluting the Impact of the 2023 Pay Raise & COLA
Current federal employees may actually get a higher check if a person receives a promotion or a within-grade increase. That will help those fortunate enough to increase their income in this way. Those who are retired are more likely to be living on an income that increases with an annual COLA.
No doubt, the COLA increases help. For those that think a COLA will retain purchasing power, that may be a mirage, even with relatively low inflation. The Senior Citizens League estimates that the average Social Security benefit has lost about a third of purchasing power since 2000. COLAs have not kept up with more expensive prescription drugs, food, and housing.
Some federal employees have an advantage of possible promotions or at least a within-grade pay increase (WIG) coming up. We know that the average federal employee pay went up despite a pay freeze during the Obama administration and that was in a period of very low inflation.
Ending A Strange Year—and Looking to the Future
2022 has been a strange year. The stock market has gone down significantly. The C Fund is down about 24% so far this year while the S Fund is down more than 30%. Inflation is still going up. No doubt, there is uncertainty and apprehension about the impact of inflation on the economy, and the possibility of a deep recession on our lives as the Federal Reserve continues to raise interest rates to try and tamp down inflation.
At the end of June 2022, the average federal employee salary, according to OPM was $95,421. At the end of June 2021, the average salary was $91,645. At the end of June 2020, the average federal salary was $90,123. This was a two-year increase of about 5.87%.
The federal pay raise that became effective in January 2021 was an average of 1% and in January 2022 the average pay raise was 2.7%. Obviously, many federal employees have increased their income more than the average annual increase. This is probably due to a variety of reasons including awarding of within-grade increases, promotions to a higher grade, and adding more employees into locality pay areas. Adding to locality pay areas does not require any change in legislation but changes are made based on recommendations by the Federal Salary Council and a decision by the President’s Pay Agent.