What Will Be The Impact Of A High COLA Increase?

Millions of active and retired federal employees care about the size of the federal pay raise, inflation, and Cost-Of-Living Adjustment (COLA). They’re even more crucial to the communities where they live, vote, shop, and raise their children in the big picture.

While raises and COLAs are essential to individuals, communities, and the country in general, the actual amounts are often unknown to workers and retirees, mainly when the change is significant. However, how the system determines those amounts makes them mostly of academic interest to both groups. What you see is what you get. Period!

Retirees receive a COLA based on the cost-of-living index provided by the Bureau of Labor Statistics (BLS). Active-duty federal employees receive benefit increases based on fiscal and political considerations rather than inflation. The President can designate a portion of the raise for locality pay, which is why federal employees in New York City, Houston, and Los Angeles earn more than those in Louisville and Boise. Even if federal pay raises are frozen, as they were in 2011, 2012, and 2013, retirees will still receive COLAs.

Federal employees received a 2.7% pay raise this year. Retired federal employees received a 5.9% or 4.9% COLA, depending on whether they were covered by the old Civil Service Retirement System (CSRS) or the newer Federal Employee Retirement System (FERS). 

In January 2022, President Biden proposed a 4.6% raise for federal employees. The retiree COLA will be decided after examining the September living cost data. However, given how much has changed in less than a year, the COLA in 2023 might be enormous.

Will the massive tidal wave of retirements be triggered if the difference between a COLA and a salary hike becomes significant? It has been anticipated since the late 1990s, but it has yet to materialize. Hundreds of thousands of active federal employees are now eligible (many more than eligible) to retire. They must determine if they would be financially secure if they retired and relied on COLAs during an inflationary period. 

That entails looking into the state of their Thrift Savings Plan (TSP) account and determining what, if anything, should be done with its allocation in light of current global economic conditions. Or would it be preferable for them to receive a regular income, relying on (potentially) lower raises while increasing their annual starting annuity by thousands of dollars? That’s a personal choice so you should discuss it with your financial advisor.

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