Inflation doesn't always produce a bigger pension

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%).

North Carolina Teachers' and State Employees' Retirement System, Raleigh, with a funded ratio of 90%, is an example of how an ad hoc system shifts between COLAs and one-time payments.

"At times, the General Assembly may determine that there are not enough budgetary funds available to cover the full liability that the retirement system takes on when a COLA is granted," says the website of the $83.3 billion pension plan. "Instead, the General Assembly may choose to grant a one-time benefit supplement instead of a reoccurring increase."

The one-time benefit, the website adds, "is typically paid all at once and does not affect any future months' payments." Retirees received a one-time payment of 4% of their annual pensions in 2022, thanks to a provision in the state budget law enacted last year. A 2021 budget law provided a 2% one-time payment to retirees in that year.

The last COLA for retirees was a 1% increase that took effect July 1, 2017. Before that, retirees received 1% COLAs in 2012 and 2014, according to pension system records.

For the $11.1 billion New Hampshire Retirement System, Concord, the legislature decides whether the system gets a COLA, a one-time supplemental payment or nothing for a fiscal year.

"This is by far the most common inquiry or complaint we receive from our retired members," spokesman Marty Karlon wrote in an email.

There was no COLA between 2011 and 2019. There were one-time supplemental payments for certain members in 2011, 2012 and 2018.

A law enacted this year, which took effect July 1, provided a $500 one-time payment to retirees or beneficiaries meeting certain requirements. Last year, another law provided a $500 one-time payment to retirees or beneficiaries using different criteria.

"While the retirement system understands and appreciates our retirees' concern about cost-of-living adjustments, this is not an issue where NHRS has discretion," said the pension system's website, which has a link to contact state legislators.

NHRS also explained that historically COLAs have been affected by the dot-com crash of 2000-2001, the Great Recession and previous legislative decisions that contributed to the system's underfunding. The actuarial funded ratio is now 65.6%. The last COLA was 1.5% in 2020 for certain members.

One example where pension plan health trumps inflation concerns and any other enhancement of benefits is New Jersey: the state pension system hasn't had a COLA since 2011. There is little chance for a revival in the near — or far — future.

A 2011 agreement between Gov. Chris Christie, a Republican, and the Democrat-controlled legislature led to a law designed to improve the health of the $91.6 billion New Jersey Pension Fund, Trenton. Funding ratios for the three largest of the seven pension funds in the system — accounting for 99% of assets — range from 39.9% to 55%.

The law included increasing state contributions to the pension system in return for, among other things, raising employee contributions and suspending the automatic COLA until each of the separate pension funds within the pension system had an 80% funded ratio.

Public employee unions and other plaintiffs sued, saying the COLA was a "non-forfeitable right," just like pensions. The state Supreme Court in 2016 upheld the COLA suspension. The U.S. Supreme Court declined to review the case.

In recent years, legislators have introduced bills in the state Senate and General Assembly seeking to revive the COLA. The bills have never left the respective committees to which they were assigned.

"Without the annual adjustment, retirees and beneficiaries will gradually see significant reductions in their purchasing power," said one of the bills introduced last year.

Gov. Phil Murphy, a Democrat, hasn't shown any interest in reviving the COLA, even as he has secured three consecutive fiscal years of full actuarial determined contributions for the pension system, including $7.1 billion for the fiscal year that started July 1.

At a legislative budget hearing last year discussing proposed pension payments for the just-concluded fiscal year, Elizabeth Maher Muoio, the state treasurer, testified that reinstating the COLA would cost an extra $2 billion in state contributions to the pension system and $1.6 billion more in local contributions to the system for that fiscal year.

To meet the 2011 law's requirement of an 80% funded ratio for each component of the system, it will take between 17 and 27 years for state contributions, depending on each pension fund, she said.

Even if their public plans offer COLAs, retirees likely won't keep up with inflation, said Anthony Randazzo, executive director of the Equable Institute, a New York-based retirement research organization. The average public pension retiree's COLA last year was 1.83%, according to a September 2022 report.

Plans with automatic COLAs would still be hard-pressed to offset inflation in recent years because COLAs are usually capped, often at 3% or less, and subject to downward adjustments.

"Most COLAs are between 1% and 2% (and are) designed as incremental increases," he said. "The purchasing power of benefits has declined."

Mr. Randazzo noted that legislators also can approve assorted other measures for pension funding to provide some benefits while making sure the changes don't bust budgets, such as creating tiers in which new employees will get smaller pensions than long-time workers. Legislators also can choose a COLA with non-compounding benefits, a less expensive formula than compounding benefits, he added.

The $179.7 billion Texas Teacher Retirement System, Austin, illustrates how the Texas legislature has used a varied approach to enhancing pension benefits. The funding ratio is 79%.

In June, Gov. Greg Abbott signed into law two benefit enhancements: a one-time payment for retirees who reach age 70 by Aug. 31, 2023, and a COLA for those who retired on or before Aug. 31, 2020.

However, the COLA payment depends on voters approving a constitutional amendment in November to finance the COLA, since the amount from general revenue exceeds the state's constitutional spending cap limit. The COLA formula has a sliding scale of payments of 2%, 4% or 6% depending on when eligible members retired.

If voters approve the constitutional amendment, it will be the first time in 10 years that retired teachers received a COLA.

The last one was granted in October 2013 for those who retired on or before Aug. 31, 2004, Rob Maxwell, a teachers' pension fund spokesman, wrote in an email. The COLA was 3%, capped at $100 per month.

The one-time payment takes effect in September. Retirees who turn 75 (or older) by Aug. 31, 2023, get a $7,500 payment. If they turn 75 after that date, they receive a one-time payment of $2,400. Retirees who turn 70 by Aug. 31, 2023, receive the $2,400 stipend.

The last supplemental payment was made in 2021 for participants who retired on or before Dec. 31, 2020. Payment was in either the amount of their monthly annuity or $2,400, whichever was less, Mr. Maxwell added.

Rob Kozlowski contributed to this story.