After the largest cost-of-living adjustment in four decades in 2023, the increase in annuities for retired government workers is projected to be much lower next year — and that’s good news for federal retirees, according to financial advisers.
The baseline COLA for next year is estimated to be 2.7%, according to the Senior Citizens League, a nonpartisan advocacy group that seeks to educate Americans on retirement issues.
For 2023, the COLA surged to 8.7%, and federal retirees saw the highest inflation increase in their benefits since the early 1980s. Now, inflation rates are slowly leveling out after reaching a four-decade high in 2022, and in response, the COLA is projected to be much more modest.
“Having a low COLA is actually a good thing,” said Dallen Haws, a financial planner for Haws Federal Advisers, in an interview with Federal Times. “It means inflation is relatively low. The moment it starts getting higher, it lags more.”
For federal employees, COLAs apply differently depending on what government retirement plan they are enrolled in. The Federal Employee Retirement System includes those who entered the civil service beginning in 1984, and the Civil Service Retirement System is applies to those working for Uncle Sam before that date.
For those collecting Social Security and annuities under the CSRS, the COLA is equal to the Consumer Price Index for Clerical Workers — the average change in prices of consumer goods over time.
Those under FERS get the full amount if the CPI-W increase is less than 2%. If it increased between 2% and 3%, the COLA is a flat rate of 2%. If it increased more than 3%, the COLA the value of the CPI-W minus one.
These adjustments, while a helpful buffer against economic instability, were never intended to fully make up for losses in value of federal employees’ retirement checks, Haws and others said. COLAs are a reactive adjustment to inflation, meaning that by the time retirees sees them on their benefit checks, in reality, their money is already behind.
“The challenge for people is that we haven’t truly seen a reduction in costs and the thing that people spend most of their money on,” said Thiago Glieger, a private wealth expert for Maryland-based RMG Advisors. “If you look at what grocery bills are, from what they were a year ago, it’s arguably still really, really high.”
The CPI-W increased 3.6% in the last 12 months — the lowest increase since March 2021, according to the Bureau of Labor Statistics.
To illustrate that, consider that as of January, the inflation rate of the CPI-W was actually lower than the current COLA, meaning that difference could mean a retiree with average benefits of $1,694 could get a $52 monthly increase in their buying power, the Senior Citizens League said.
On the other hand, that difference may be hardly noticeable since inflation took such a large chunk out of value in the last two years. The average Social Security benefit fell behind by $1,054.
Thrift Savings Plan
For those not ready to retire, experts urged prioritizing a savings account, like the Thrift Savings Plans, to create a stable source of income in times of volatility.
So how can feds save effectively?
“Sometimes people get a little scared because the markets can be volatile and maybe they don’t invest as aggressively as they should,” Glieger said.
In other instances, as experts have seen in the last few months, the I Fund of the TSP has been outperforming the other investments. Glieger said he has seen hundreds of millions of dollars invested into the I Fund as news of its good returns spread.
However, he warned against chasing trends and instead urged federal employees to have a well-informed plan that is more proactive than reactive. Otherwise, feds may only take advantage of a hot rate when it’s about to cool off.
Remember, too, that the 2.7% COLA is just an estimate. The actual COLA for 2024 will be determined based on how much the CPI-W changed in the third quarter of this year compared with last year. The final number will be announced in October and becomes effective on Dec. 1. Adjustments appear in January checks.
Molly Weisner is a staff reporter for Federal Times where she covers labor, policy and contracting pertaining to the government workforce. She made previous stops at USA Today and McClatchy as a digital producer, and worked at The New York Times as a copy editor. Molly majored in journalism at the University of North Carolina at Chapel Hill.