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Cost of Living Adjustments for Your Retirees
Cost-of-living adjustments (COLAs) allow you to increase your retirees’ benefit payments to restore purchasing power lost due to the effects of inflation.
Here’s how COLAs work:
The retirement benefits that your retirees receive don’t automatically increase to compensate for inflation. This means that your retirees lose purchasing power as the years go by. Paying for everyday living expenses — such as groceries, housing and transportation — can get increasingly difficult as prices go up. Granting your retirees a cost-of-living adjustment (COLA) is a good way to help them maintain their purchasing power throughout their retirement years. You can choose either a flat-rate COLA or one that’s based on the Consumer Price Index (CPI).
With this type of adjustment, the benefit payment permanently increases by a percentage of your choosing up to the limit set by the TCDRS Board of Trustees each year. Everyone gets the same percentage increase. However, a flat-rate COLA may not adequately address a retiree’s loss of purchasing power. For example, a recent retiree may have lost only a small percentage of purchasing power, while someone who’s been retired 20 to 30 years may have lost more than 50%. A 3% flat-rate COLA might take care of the new retiree’s loss of purchasing power, but wouldn’t begin to address the older retiree’s loss.
The Consumer Price Index for All Urban Consumers (CPI-U) is an index the federal government uses to measure inflation. With this type of adjustment, you may choose to permanently increase your retirees’ benefit payments by a percentage based on the increase in the CPI-U. A CPI-based COLA helps restore the lost purchasing power for each retiree, based on the retiree’s original benefit payment amount and how much inflation has occurred since each retiree started receiving the benefit.
How COLAs Affect Your Rates
A COLA will increase your employer contribution rate, and not just for one year. Because you fund a COLA over 15 years, the rates for each COLA can stack up on any previous COLAs. As a result, if your organization regularly adopts COLAs, your contribution rate will tend to creep upward. To keep COLA adoptions from causing your contribution rate to climb, consider making an additional contribution to pay for it upfront. (See Controlling Plan Costs.)
For help defining the best program for your retirees, contact your TCDRS Employer Services Representative at 800-651-3848.
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