Following the Great Recession and extending into the low-interest-rate environment of the 2010s, state legislatures reduced, suspended or eliminated cost-of-living adjustments among public plans in the name of protecting pension systems' health.
Their record is decidedly more mixed during the recent run-up in inflation and interest rates, rejecting COLAs for underfunded pension plans and offering one-time supplemental payments to retirees as a compromise between COLAs and nothing.
"My general observation is that it seems to be politically easier to reduce COLAs when interest rates and inflation are low," said Keith Brainard, the Georgetown, Texas-based research director of the National Association of State Retirement Administrators. As inflation has spiked, "legislatures have been slower" to adjust COLA provisions or make changes to one-time payment policies, he added.
Inflation presents a dilemma to legislators and pension board executives because they don't know how long or how severe inflation will last, he said. "The longer inflation lasts, the greater the pressure" to restore or increase COLAs, he said.
"There's a strong narrative about the health of pension plans," said Jean-Pierre Aubry, associate director of state and local research at Boston College's Center for Retirement Research, describing the balancing act between strengthening public pension funding and preserving retirees' purchasing power.
For the one-time payment strategy, legislators and plan trustees say, "We can provide something that helps the retirees and limit the plan risk in the future," Mr. Aubry said.
Nationally, the overall estimated funding ratio of the 100 largest U.S. public pension plans improved slightly to 74.8% as of April 30 from 74.5% a month earlier, according to the Milliman 100 Public Pension Funding index. Much of the COLA strategy variations occur in so-called ad hoc plans, which give legislatures and some pension plan boards an opportunity each year to assess or change benefits.
An August 2022 survey by the Center for Retirement Research of 220 state and local plans covering 90% of public plan assets showed 24% used an ad hoc approach for setting COLAs. The most frequent COLA strategies were those linked to the consumer price index (35%) and those with a fixed number (29%).