With inflation still rising, the 2023 COLA might be one of the biggest since 1982.
When it comes to sizeable cost-of-living adjustments (or COLAs), last year’s adjustment was among the largest since 1982. The 2022 increase ended up being 5.9%, which is 0.1% higher than what it was in 2009 (5.8%), and that was the largest COLA since 1990- when it was 5.4%. To get to years when the COLA was even more substantial, you’d have to go back to 1982, when the adjustment was 7.4%. Although FERS didn’t even officially exist yet in 1982, there were some retirees collecting FERS retirement benefits in 1990, and due to the “diet” or “flat” COLA rule, received 1% less than their CSRS counterparts, meaning their COLAs were 4.4% that year, 4.8% in 2009, and 4.9% for 2022. Those collecting social security benefits, like CSRS, also see a “full” COLA, which is based on the CPI (Consumer Price Index) for Urban Wage Earners and Clerical Workers.
2023 COLA Outlook
There are a few important components to calculating COLAs that should be kept in mind if one is trying to predict their upcoming COLA.
- Although the months of October to June are useful in predicting what COLAs might be, the actual adjustment is based on the average inflation, reflected in the CPI above, for the months of July to September. So even though the current CPI rate shows 5.5% inflation, including a 1.5% spike in March, this only helps in estimating what inflation will look like in the months that really matter. That being said, the 5.5% growth in the CPI for Urban and Clerical workers does strongly indicate that the 2023 COLA will join 1990, 2009, and 2022 as one of the higher COLAs seen since 1982.
- Remember the COLA takes effect in December and is seen in the monthly FERS, CSRS, and Social Security checks starting in January. Also, if you’ve been retired from the Federal Government for less than one year, you don’t receive the full COLA for CSRS and FERS (although this rule doesn’t apply to social security COLAs). So, if you retired in January, you’ll get 11/12th of the COLA. 10/12th for February, and so on. After you’ve been retired for a full 12 months, this rule isn’t applicable.
- Lastly, for FERS employees only, don’t forget about the “diet” or “flat” COLA rule. The way it works is if the COLA is 2% or less, FERS annuitants receive the whole adjustment. If between 2% and 3%, they get a flat 2%. For adjustments over 3%, FERS retirees receive the full COLA minus 1%. This is why CSRS annuitants got the full COLA of 5.9% last year and FERS annuitants received 4.9%.
Until Next Time,
**Written by Benjamin Derge, Financial Planner, ChFEBC℠ The information has been obtained from sources considered reliable but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of Benjamin Derge and not necessarily those of RJFS or Raymond James. Links are being provided for information purposes only. Expressions of opinion are as of this date and are subject to change without notice. Raymond James is not affiliated with and does not endorse, authorize, or sponsor any of the listed websites or their respective sponsors.