COLA: Rising Inflation Adds to Urgency

Janaury 2022 Voice: In the past two editions of The Voice, we documented the outstanding long-term investment success of our Massachusetts public pension systems and our belief that the success can and should be shared with retirees by way of improved COLA benefits. 

However, there is also a downside to a white-hot economy – Inflation! 

In October, the US Bureau of Labor Statistics announced that the Consumer Price Index (CPI), for establishing the Social Security COLA, has risen to the highest level since 1983, coming in at 5.9% for the year. 1983’s 7% COLA was less than half of that which was paid three years prior, when inflation hit a generational high with a 14.3% CPI. 

The sharp rise in inflation comes as no surprise to anyone visiting the grocery store checkout line or purchasing any goods in recent months, that is if one can find the item needed in stock! As everyone learns in grade school, the basics of inflation are driven by supply and demand. In this case, the demand of American consumers for goods cannot be met by the supply chains, largely due to the economic changes brought about by the ongoing global pandemic. 

Retirees receiving a Social Security benefit will see a 5.9% COLA in the January payment. COLA payments for public pensions take place in July, with the state legislature and local retirement boards voting to authorize the FY23 payment throughout the late winter and spring. 

Current state law limits the ability of local retirement systems to grant a COLA that exceeds 3%. COLA payments for retired state employees and teachers are authorized by the legislature. Traditionally, this takes place through the annual state budget process, which also contains language governing the state/ teacher COLA base and funding of the respective State and Teachers Retirement Systems. 

Since the announcement of the 5.9% CPI for 2022, Association officials have been hard at work pushing for the passage of a temporary law that authorizes the payment of a 5.9% COLA by local retirement boards. This temporary authorization would authorize each of the 102 local 5-member retirement boards to pay an FY23 COLA beyond 3% - up to the full 5.9% CPI. 

“The fact is that retirees are struggling with the largest jump in inflation in 38 years, while at the same time our pension investments are returning record breaking profits. Looking at the price increases of food alone, never mind gas and most everything else, and it is not hard to see that our members need help,” said Mass Retirees President Frank Valeri, who also serves as a member of the State Retirement Board. “Through October, the Commonwealth’s PRIT Fund had earned more that 17% in 2021. We are on track for the 3rd consecutive year of double digit returns and the 4th out of the past 5 years. 

“As we detailed in both the September and November newsletters, the success of our public pension investments over the past decade has been historic. This success should be shared with the systems’ beneficiaries, as was the plan when the systems were originally established generations ago.

Improving COLAs: Three Areas of Focus

Heading into 2022, Mass Retirees has three areas of focus when it comes to making improvements to the COLA. At the local level of government, each of the 102 local retirement boards has the ability to make improvements in collaboration with their respective legislative bodies. This process is detailed in the November edition of The Voice

FY23 COLA Payment based on the 5.9% CPI 

Legislative action is required to grant local retirement boards the authority to pay a COLA beyond 3%. Mass Retirees is advocating for the passage of such legislation and welcomes the support of local retirement systems, as well as local retirees. 

Action benefiting retired State Employees and Teachers comes through the state legislature, with the approval of the governor. Therefore, Mass Retirees is now working toward passage of legislation targeting three aspects of the COLA. 

While the pension funding schedules of both the State and Teachers Retirement Systems assume an annual 3% COLA be routinely paid each fiscal year, we believe that a one-time increase can be granted for FY23 that will not impair the funding schedule. 

Increased State and Teacher COLA Base 

Currently set at $13,000, the COLA base for retired State Employees and Teachers has increased just once since 1997, when the minimum $12,000 base was established through the landmark COLA reform bill (Chapter 17, Acts of 1997). The last increase in the base took place in 2011 – ten years ago! 

A December 2019 analysis by the Public Employee Retirement Administration Commission (PERAC) placed the annual cost for each $1,000 increase in the COLA base for the State and Teachers’ systems at roughly $54 million, with an unfunded liability of $464 million. According to PERAC Actuary John Boorack, a move to a $16,000 base would carry an annual cost of roughly $165 million, with some $1.5 billion in new liabilities spread over the life of the funding schedule. 

The ongoing costs for each increase in the COLA base are due to the fact that the Massachusetts COLA becomes a permanent part of a retiree’s base pension. Each COLA payment is cumulative for all retirees. And since the COLA assumption is built into the pension funding schedule, payments to future retirees are part of the long-term funding plan and must be factored into the ongoing costs of the system. 

Due to both the long-term success of investment returns, as well as the significant excess earnings generated by PRIT, the state should be able to absorb (at least in part) the costs of a modest COLA base increase. 

Our Association is calling for a $3,000 base increase, which would bring the total to $16,000 for State and Teacher Retirees. In addition, a plan is needed by which the base can be periodically examined and incrementally increased to better keep pace with inflation. 

Enhanced (Senior) COLA 

In 2019, our Association proposed the creation of a new COLA benefit to be paid in addition to the traditional COLA. This new Enhanced or “Senior” COLA is designed to provide an annual boost for long-term retirees whose pension benefits have suffered due to inflation. 

In our proposal (S1677, filed by Senator Brendan Crighton), retirees with more than 20 years of creditable public service who have been retired at least 15 years and are receiving a pension benefit below the retirement system average would receive an additional $100 annually. Those retired 20 years or longer, who meet the same criteria, would receive a $200 annual increase.

“The focus of this proposal is to help those retirees most in need. The State and Teacher systems alone have more than 8,000 people who meet the criteria and have been retired between 15-20 years. Those numbers jump to more than 14,000 people who have been retired 20 years or longer,” explains Legislative Liaison Nancy McGovern. “All told, more than 22,000 retired state employees and teachers would benefit from an enhanced COLA.

“Another important factor to remember with these groups is that as career public employees, many do not qualify for Social Security. If they happen to qualify, then the WEP and GPO laws take a big toll. For this group the main, if not sole, source of income is their public pension. For this reason alone they are in need of additional help.”

According to PERAC’s 2019 analysis, the annual cost of the Enhanced COLA to the Commonwealth is just $14.9 million, with a total increase in liability of roughly $166 million.

If passed into law, the benefit would automatically take effect for State and Teacher retirees. The measure would then become a local option, to be adopted by each of the 102 local retirement boards and their respective local legislative bodies. Local option is a longstanding practice under state law, which dates back to 1980 and Prop. 2 1/2.

Tags: