2022 has been hitting consumers hard. Inflation in 2022 is still going up and stock prices are still going down. Wages (and the COLA) do not keep up with the actual inflation rate.
We have been experiencing the highest rate of inflation in more than 40 years. As of last month, we know the 2023 COLA will be 8.7%—the largest increase in this annual ritual since 1981. The 2022 increase followed the 5.9% COLA for 2022. The 5.9% increase was the largest COLA increase in 40 years.
Wage and COLA increases do not keep up with inflation. The practical result is that the purchasing power of consumers is decreasing and our overall standard of living is declining.
And, while purchasing power declines, federal employees (and other 401(k) investors) are watching the value of their retirement investment decline. As of the close of the stock market on November 9, 2022, here are how the core TSP Funds are performing so far this year:
As a result of these returns, the number of the most successful Thrift Savings Plan investors—those with at least $1 million in their TSP accounts—has declined by 42% since 2021.
7.7% Inflation Over the Past 12 Months
According to the Bureau of Labor Statistics, over the last 12 months, the “all-items” CPI index increased 7.7%.
The index for shelter contributed over half of the monthly all items increase but gas and food also went up. Gas was up 4% for the month and food was up 10.9% for the year and up 0.6% in October. The energy index increased 1.8 percent over the month as the gasoline index and the electricity index went up.
There Is Some Good News
For those looking for good news, the all-items index “only” increased 7.7 percent for the 12 months ending in October. This is good news because it was the smallest 12-month increase since the period ending in January 2022. In other words, inflation is still with us and still impacting all of us but it is no longer at the highest level it has been for the past 40 years.
The reality is that price increases have remained high as they have spread beyond the cost of products to more labor-intensive services. These services include shelter, medical care, and car insurance. When inflation seeps into these services, it is harder to reverse the trend after it starts.
The CPI-W index is often of most interest to those in the federal community as it is the index that ultimately determines the next COLA increase. For October, the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) went up 7.9 percent over the last 12 months.
Keep in mind that the 2023 COLA is already in place and those entitled to receive the increase will see larger payments in January. The COLA increase is always based on earlier data. Future increases will not be tallied until October of 2023 for the 2024 COLA calculation.
Wondering Why Your 2023 COLA Increase is not 8.7%?
There is a difference in the COLA calculations for those under FERS and for those under CSRS. The FERS pension COLA is based on the same inflation gauge as those under CSRS (the CPI-W). If the CPI-W shows prices are higher, FERS and CSRS pensions will also go up.
Social Security and CSRS pensions receive COLAs based on the rate of inflation as calculated by the CPI-W. The COLA for FERS pensions is less generous.
If the inflation rate is less than 2% in a year, a FERS pension will increase by the full amount of the COLA. If inflation rises between 2% and 3%, the FERS COLA will be 2%. If inflation is up more than 2%, the FERS COLA is the inflation amount minus 1%.
In other words, when the measure of inflation is up more than 2%, a FERS pension increase will fall behind. For a person who may be retired for many years, this difference is likely to be substantial over time.
So, when inflation is above 3% using the CPI-W index, FERS pensions will lag 1% behind this inflation rate every year in which this occurs.
Why Your Retirement System Impacts Your 2023 COLA
While those under FERS 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. Those employees under CSRS do not receive Social Security as part of their federal retirement plan.
FERS employees also have access to invest for their future retirement through the Thrift Savings Plan (TSP) for their entire federal career. 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.