Chicago, Providence. RI, the State of New Jersey, the federal government and many other entities are trying to deal with the cost of their employee pensions. Add to that the problems facing Social Security and you have a good case against the automatic cost of living allowance (COLA).
As with Social Security many public pension plans (and a few private) have built-in COLAs, some geared to inflation, some with annual caps, but others with fixed rates of increase each year regardless of actual inflation. In effect this puts pension increases on automatic pilot without regard to the ability to pay. Up until 1972 legislation, Social Security COLAs were only granted upon an act of Congress.
See below from the history of Social Security.
Faced with growing costs and liabilities public pension plans are cancelling COLAs or suspending them until the pension trusts are adequately funded. In many cases, retirees have received higher annual increase than active workers.
Not only do COLAs make predicting the cost of a pension plan that much more difficult, but the problem is compounded when COLAs increase during a downturn in the stock market (more benefits are paid as the value of assets are declining) and when the plan is underfunded for many years as is the case with many government plans.
I submit that keeping up with inflation in retirement is not the responsibility of a pension plan.
Rather, it is the individual’s responsibility through supplemental saving. Many, if not most, public entities have supplemental defined contribution plans in addition to traditional pensions. There simply is no need for COLAs plus supplement pension plans in the form of 403(b) or 401(k) plans. COLAs were added to traditional pension before defined contribution plans became common.
If a sponsoring entity, including the federal government is able to afford a cost of living increase on an ad hoc basis, that is one thing, but setting a COLA as part of plan provisions with no control over the costs they add is a bad idea. That point is being made perfectly clear today with unfortunate consequences for current and future retirees. Adjusting the COLA within Social Security will be in the forefront of reform to extend the solvency of that program.
The Story of COLAs [in Social Security]
Most people are aware that there are annual increases in Social Security benefits to offset the corrosive effects of inflation on fixed incomes. These increases, now known as Cost of Living Allowances (COLAs), are such an accepted feature of the program that it is difficult to imagine a time when there were no COLAs. But in fact, when Ida May Fuller received her first $22.54 benefit payment in January of 1940, this would be the same amount she would receive each month for the next 10 years. For Ida May Fuller, and the millions of other Social Security beneficiaries like her, the amount of that first benefit check was the amount they could expect to receive for life. It was not until the 1950 Amendments that Congress first legislated an increase in benefits. Current beneficiaries had their payments recomputed and Ida May Fuller, for example, saw her monthly check increase from $22.54 to $41.30.
These recomputations were effective for September 1950 and appeared for the first time in the October 1950 checks. A second increase was legislated for September 1952. Together these two increases almost doubled the value of Social Security benefits for existing beneficiaries. From that point on, benefits were increased only when Congress enacted special legislation for that purpose.
In 1972 legislation the law was changed to provide, beginning in 1975, for automatic annual cost-of-living allowances (i.e., COLAs) based on the annual increase in consumer prices. No longer do beneficiaries have to await a special act of Congress to receive a benefit increase and no longer does inflation drain value from Social Security benefits.
Related articles
- Judge upholds suspension of pension increases for N.J. public employees (nj.com)
- State Pension Debate: Black, White & A Whole Lot of Grey (401kplanadvisors.com)
- Causes of Public Pension Underfunding Are Not Hard to Identify (openmarket.org)
- Illinois pension mess
QUINNSCOMMENTARY 
That’s silly, pension should keep up with Cola’s because its the same value, pensions are given in part because salaries are lower and employer and employee contributions , if a person’s salary rises due to inflation, that is the same amount they got yesterday, then a pension should be the same since the employee is receiving a lower amount than if the pension were not given at all but to salary.
If my pension is 5 bags of chips in 1975, inflation would make it 1 bag or less of chips, if the government prints money, the money goes down in value, hence the COLA, it would be hard to match inflation if you have 1 bag of chip worth of value to turn it into 5 bag of chips, so your argument is not sound, however 401k type plans operate in this matter, that matter could work in which the retiree tries to match or beat inflation with a lump sum,
, let’s do the math, your pension in 1975 was $5,000 which is $25,000 today, however because of no cola, you get the same $5,000 , in other words you pension is 80% less than promised, this could be resolved by paying in gold and silver to an extent, if you promise me a 1/4 pound of gold every year and have it in reserves then fine, sure gold fluctuates but its great store of value because it cannot be printed.
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That’s all well and good… If the entity providing the COLA can afford it which is why COLAs in private pensions are rare, very rare. They are common in state and federal plans which should tell us something about responsible pension funding. In the case of many states they simply don’t fund their obligations.
A base pension needs to be supplemented by additional personal savings over ones lifetime. If a tax advantaged vehicle such a 401(k) or IRA is available for that purpose so much the better. This is how you keep up with inflation, not by burdening the pension plan or taxpayers.
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$5,000 in 1975 would need $21,292.19 to have the same buying power in 2012, but that is 37 years ago and an unlikely scenario. However, it does provide a lesson. Those who think they can retire early and live comfortably for 35 to 40 years in retirement better have a plan to supplement their income.
Pensions are in fact part of compensation, but tell that to workers who see their promised pension frozen or the plan terminated or future benefit accruals reduced because the plan is no longer affordable.
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