State Pension Plans Prefer Diet COLAs

This post was originally published at TeacherPensions.org

By Leslie Kan

The Louisiana Legislature last year agreed to a 1.5 percent cost-of-living adjustment (COLA), meaning that retirees will see a small boost in their pension payments.* In Louisiana, like most other states, cost-of-living adjustments are a way for state pension plans to offer retiree benefits that are adjusted for inflation and are usually determined by the state legislature. Louisiana previously linked their pension plan’s COLAs to just changes in the Consumer Price Index (CPI), but now also tie COLAs to investment gains so the amount they adjust for is subject to change according to the plan’s funding levels. COLAs, like pension benefits themselves, are entangled in the political process, and so retirees must rely on the legislature to get their benefits.

While the formulas used to determine public sector pensions have ironclad legal protections—protecting past and sometimes even future benefit accruals—COLAs face less scrutiny. The Center for Retirement Research reports that 17 states reduced, suspended, or eliminated their COLAs from 2010 to 2014. While most of the cuts were challenged, the courts upheld 10 of the 12 cuts (except in Illinois and New Jersey, where the case is still pending in a lower court but a COLA freeze remains).

But compared to the uncertainty around public pension COLAs, Social Security benefits automatically adjust for inflation. While debates rage on what measure of the CPI to use, the fact is that Social Security benefits are automatically adjusted each year. Unlike in state pension plans, workers don’t need to worry about the value of their Social Security benefits eroding over time. Today, six teacher pension plans offer COLAs less than the change in CPI (when it’s positive) or have eliminated COLAs altogether. Another 12 teacher pension plans are left to the ad hoc decision-making of their state legislatures or are based on investment returns.

This is bad news for public workers who don’t participate in Social Security. Teachers in Louisiana may get a temporary win with their new COLA, but overall, they lose out because Louisiana teachers and other public sector workers aren’t covered by Social Security. Instead, they’ll have to hope that investment gains improve in order to see any further increases. Similarly, states with ad hoc increases will have to depend upon their legislatures to approve adequate adjustments from year to year. States without coverage historically banked on their pension systems to Social Security, but that wager carries more risk.

*Update: Governor Bobby Jindal vetoed the COLA bill, so Louisiana’s retirees will not receive an increase to their pensions.  Instead, the 1.5 boost will go into effect next year, unless other legislative changes are made and/or funding levels and investment gains change.