Why a 6.2% COLA is not good news for the average person

Why a 6.2% COLA is not good news for the average person

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I’ve seen a ton of articles lately on the projected 6.2% Cost of Living Adjustment (COLA) that will be afforded to many local, state, federal, railroad, and military pension (including VA benefits) recipients, and Social Security beneficiaries. Let’s talk about why this may not be a good thing like many people believe.

Why do we have a COLA?

In short, the COLA exists as a means to ensure pension and social security payments keep up with inflation. As of July 2021, the projected inflation numbers came in around 6.2%, which correlates to the projected 6.2% COLA. Inflation occurs when the overall cost of living rises in the United States. As you can probably recall, we’ve experienced price increases on most consumer goods in 2021, with other significant increases in things like the price of steel, lumber, gasoline, housing, etc.

If you don’t receive a COLA, it is an absolute certainty that the purchasing power of your pension will diminish by roughly 6.2% at the end of the year. This is basically a hidden pay cut in retirement. Ouch.

Who does this hurt?

Well, the actual COLA doesn’t hurt anyone except the pension funds and taxpayer coffers in some cases. Oh, and the current pension contributor’s that see their contribution rate increase to make up for the large pension fund shortfall. But nonetheless, the actual inflation that drives the COLA ensures that a lot of people will take pay cuts without realizing it.

Wages often fall behind inflation, which means the working class could take the brunt of this. If you don’t receive a raise in 2021 or early 2022, you have effectively lost money. Take a look at the chart below to see the inflation numbers for the U.S. over the past 10 years.

YearInflation Rate (%)
20201.23%
20191.81%
20182.44%
20172.13%
20161.26%
20150.12%
20141.62%
20131.46%
20122.07%
20113.16%
20101.64%
Source: Macrotrends

As you can see, if you haven’t received a raise in the last 10 years, it’s time to look for a new job! Don’t let your employer keep you from increasing your pay.

How to keep up with inflation

There are several ways to do this, but we’ll just touch on a few. The easiest, and probably the most guaranteed way to protect against inflation, is to get a government job that guarantees an inflation-protected pension in the future. The negative of this is that you may earn less during your working years. This is a situation where you need to crunch some numbers and see what would work best for you.

Other effective ways to mitigate inflation are to invest in the stock market, buy real estate, and make professional improvements in order to increase your pay. If you are currently working, you can look to change jobs. There are currently tons of jobs available. You should know that the easiest way to increase your pay is to change companies. Don’t think you have to be loyal to your current employer.

If you really need to fill that inflation induced gap in your income you can look at picking up a side hustle (kind of like we are doing here at Wealthy Idiots!).

Regardless of what path you choose, just know that you won’t come out on top by sticking your money in a savings account or hiding it under your mattress.

What to do now

The best thing you can do is understand inflation. If you know the impact inflation has on your money you can work diligently to mitigate it. If you ignore the problem and act like it doesn’t exist, it will certainly eat away at your salary, savings, and future earnings. Get your head out of the sand and protect your own financial interests!

Author

  • D.C. joined the Marine Corps right out of high school. When he left active duty after 5 years of service, he quickly earned a bachelors degree and an MBA. He got his first private sector job at a modest salary and quickly worked his way up through promotions. Once he started making decent money ($38k at the time), he quickly realized he needed to learn how to save for his future. After nearly ten years of research and application, he wants to share his knowledge and financial best practices so more people can become Wealthy Idiots!