The premise of every good news/bad news joke is that the good news makes for a positive feeling but the bad news that follows wipes it out.
With that as an introduction, the good news for federal retirees is that the 2022 inflation increase to their benefits looks like it will be the largest in decades.
Federal retirement cost of living adjustments, or COLAs, are based on the same inflation index used to increase Social Security benefits and a number of other federal benefits. It is a measure of the change in the consumer price index for urban wage earners and clerical workers, called the CPI-W, from the average of one calendar year third quarter to the next.
The count ends with the release of the figures through September, which annually is announced in mid-October, with the adjustment taking effect in the following January. Those retired under the CSRS program get the full amount regardless of age, while those retired under the FERS generally are not eligible until age 62 and when the amount is above 3 percent, they receive a COLA of 1 percentage point less. In both, payouts are prorated for those on the retirement rolls for less than 12 months.
Now near the end of the count toward January 2022, it appears the CSRS adjustment will be 6 percent or more, therefore the FERS adjustment 5 percent or more. They will be the largest in more than 30 years; the 1990 COLAs were 5.4 and 4.4, the 2009 COLAs 5.8 and 4.8.
Now, there’s a lot to be said about COLAs, including that:
Even the FERS formula compares favorably to that of many private sector defined benefit programs, which—if they exist at all—often provide either no COLA or an even stricter limit.
During those 30 plus years, there were three—2010, 2011 and 2016—in which retirees received no COLA since the inflation count was negative (in that case benefits are frozen but not reduced).
The 2022 COLA likely will be about double the pay raise that active employees will receive—probably 2.7 percent—due to the nature of the two. The retiree COLA is automatic while the pay raise is negotiated in the annual federal budget process just like spending levels for countless other things.
All that said, one of the most notable features of the current COLA count is that some retirees have taken to rooting—there is no other word for it—for the COLA to go up, up, up. There’s actually some gloating about the difference between the upcoming boosts for retirees compared with active employees.
Let’s not lose sight of what the CPI reflects: the erosion of purchasing power by inflation. Broadly speaking, what a 6 percent COLA will mean is that a sampling of goods and services that cost $100 12 months before, now costs $106. COLAs are meant to keep benefits even with inflation; they don’t gain ground.
In fact, even with COLAs, retirees commonly claim that they are losing ground. That is the argument behind long-standing proposals to change the index used in setting the COLA from the CPI-W to what is called the CPI-E. (The E stands for elderly, which it defines as 62 or older. No comment.)
Federal employee and retiree advocates and some in Congress have long advocated changing to the CPI-E on grounds that the CPI-W understates the impact of inflation on retirees because of their different spending patterns.
The CPI-E adjusts the weights of the different components of the CPI to take that into account. For example, it gives more weight to the medical care and housing components—especially the former—and somewhat less to transportation, food/beverages and apparel.
The Labor Department has calculated a CPI-E for decades, mostly as an academic exercise, and the result on average has been a figure about a quarter of a percentage point higher than that of the CPI-W.
That may not amount to much in a given year, but over time it would add up; that’s why retiree interest groups are advocating for it.
But more important is what’s behind the CPI-W vs. CPI-E debate: that the CPI-W understates the true impact of inflation on retirees. The bigger the CPI-W figure, the more that impact is being understated. If you root for a bigger COLA, you’re rooting for a still larger erosion of your spending power.
And that’s the bad news.