We have some mixed news for our feds on the 2025 COLA front.
To clarify, in this case, COLA refers to the cost-of-living adjustment for CSRS and FERS pensions. We draw this in contrast to estimates for the 2025 federal pay raise.
The Senior Citizens League routinely follows and distills data related to the consumer price index to form estimates for anticipated COLAs for the coming year for Social Security Recipients. Our readers will note that the Social Security CPI-related COLA serves as a fair proxy for CSRS retiree COLAs and stays within 1% of FERS COLAs. The league has been leaning toward an increasing COLA percentage as recently as last month.
But now, a surprising number from the May CPI may trigger a re-estimate.
For clarification, CPI stands for the Consumer Price Index. This data, assembled and published by the Bureau of Labor Statistics, attempts to estimate the direction of the US cost of living accurately.
The CPI is defined per the BLS:
The Consumer Price Index (CPI) is a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services.
The June 12 CPI report covering data through the month of May showed a surprising zero increase month over month. Additionally, the report showed that the CPI rate held level from this time last year at 3.3%
A survey of economists done by DOW Jones had expected a monthly increase of .1% in May, resulting in an annual reading of 3.4%. It is, however, important to note that when the data for food and energy prices, which feature greater volatility, were backed out, the remaining core CPI did increase by .2%, adding to an annual increase of 3.4%. Still, even these numbers were below analysts’ expectations and came in at .3% and 3.5%, respectively. One reason for the differing numbers can be traced to an increasing cost for housing that rose .4% in May and 5.4% year over year.
A true bright spot in the report revealed that the energy index dropped by 2%, offering relief to our feds at the pump.
Further adding to the inflationary noise, the Federal Reserve announced this week that it would hold rates at their current level and signaled that only one rate cut might be anticipated this year.
So, what might all of this mean for COLA expectations for retired Feds?
Based on the May data, the Social Security COLA estimate stands at 3%. If this holds, it would translate to a 3% COLA for CSRS retirees and a 2% COLA for FERS retirees, the difference driven by the different COLA calculation formulas.
For more information on the FERS COLA formula, read Ed Zurndorfer’s article: https://stwserve.com/how-colas-work-for-fers-annuitants/.
Additionally, Senator Alex Padilla D-CA introduced the EQUAL COLA ACT last year to address the disparities between two federal retirement plans. A longtime champion of the federal workforce, Congressman Gerry Connolly, D-VA, is pursuing similar legislation in the House of Representatives.
So, what does this all mean for anticipated COLAs (And even pay raises for civilian Feds)?
We still have a long way to go until October, and over the years, these reports have frequently fluctuated. Nevertheless, any slowing in inflationary trends may catalyze a smaller COLA for FERS and CSRS Retirees.
So, is that a good thing or a bad thing? Again, the devil is in the details.
AARP and other groups that advocate for the interests of retirees favor the use of a different index for calculating COLAs, the R-CPI-E.
Again, per the BLS:
The BLS calculates a research price index called the Consumer Price Index for Americans 62 years of age and older, or R-CPI-E. The R-CPI-E is used by those interested in measures of price change specifically based on the spending patterns of Americans 62 years of age and older (as defined in the construction of this index).
So, an index designed to measure the cost of living for folks over 62. Sounds like a great idea to use for retirees. When we consider that the R-CPI-E frequently results in a more generous recommendation for a hypothetical COLA, the change sounds even more enticing. Unfortunately, the R-CPI-E is not without vocal critics, and the dispute seems to make its adoption unlikely anytime soon.
So, where does this leave the Feds? Unfortunately, they are beholden to economic models and political winds for current and future increases in pay and retirement income.
But that does not mean you are helpless.
One of the most overlooked aspects of federal retirement plans is the TSP and its role in inflation resistance planning.
So, what do we mean by inflation resistance? COLAs are designed to match or close the gap on inflation as it appears in the US economy. We can debate for years to come what metric should be used and if the data interpretation translates into a truly accurate cost of living adjustments to income streams from Social Security and CSRS and FERS pensions. However, what is inarguable is that COLAS is meant to react to inflation that has already occurred.
You need to deploy dollars from your annual income with the specific goal of growing faster than inflation.
For most feds, that means TSP.
Here are the rules:
- Maximize contributions.
- Establish a reasonable asset allocation for long-term growth.
- Review the allocation periodically and rebalance.
- Resist the temptation to change allocation based on current events.
- Reread the first four rules when in doubt.
Why do we stress the rules?
All too many feds are under-contributing to TSP.
The Federal Retirement Thrift Investment Board reported that for 2023, 86.8% of civilian federal employees were contributing at least 5% (enough for the match under FERS).
Hold your applause, please. This means that over 13% are not. 13% are saying no to free money.
For that group, the score is: Inflation 1, Feds 0.
Further, the TSP maximum contributions for 2024 are $23,000 in base contributions with an additional $7500 in “catch up” contributions available for feds over the age of 50.
If you want to resist inflation, you need to work to maximize your TSP contributions, not just contribute up to the match.
All too many feds have all or most of their funds in the G fund.
One of the statements that never cross our lips is that “the G fund can’t lose money.” While it is true that the underlying bonds for the G fund are not publicly traded and cannot fluctuate in value from day to day, there is more than one way to lose money.
The G fund frequently trails inflation as measured by the CPI. At best, it matches or is slightly ahead sometimes. This is the same song as COLAs.
Per the St Louis Fed, the 30 rate of inflation is 2.34%.
A properly designed and deployed asset allocation across the five TSP core funds can enjoy long-term growth rates substantially larger than the long-term inflation rate. This is where your future prosperity is built.
Don’t take inflation lying down.
Don’t pin your hopes on COLAs.
Fight back with a strong TSP strategy.
To learn more about how you can build a strong retirement plan, check out our complimentary webinars on TSP and Financial Planning for Feds at https://stwserve.com/webinars-and-seminars/webinars-for-federal-employees/.
Your future self is counting on you!
Until next time.
Check out our webinars for federal employees!
You Might Also Enjoy This Podcast
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 Serving Those Who Serve writers and not necessarily those of RJFS or Raymond James. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Investing involves risk and you may incur a profit or loss regardless of strategy suggested. Every investor’s situation is unique and you should consider your investment goals, risk tolerance, and time horizon before making any investment or financial decision. Prior to making an investment decision, please consult with your financial advisor about your individual situation. While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS, we are not qualified to render advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional. **
