Cost of COLAs in Massachusetts Public Retirement Systems
Study Finds Increased Pension COLA Will Require Communities to Appropriate Additional $500 Million Over 20 Years
State, teachers’ and 47 of 103 local systems have raised base amount to which COLAs are applied
BOSTON – Raises enacted by local public-employee pension systems to the base pension amount on which cost of living increases (COLAs) are applied will require communities across Massachusetts to appropriate an additional $500 million over the next 20 years according to a new study published by Pioneer Institute.
The Cost of Cost-of-Living Adjustments in Massachusetts Public Retirement Systems
Local retirement systems that have already raised the COLA base have an average funded ratio of 58 percent and a total unfunded liability of $3 billion.
“Our goal is not to tell local officials whether they should raise the COLA base,” said Salem State University Professor of Economics Ken Ardon, who wrote “The Cost of Cost-of-Living Adjustments to Massachusetts’ Public Retirement Systems” with his colleague, Professor Van Pham. “We just want them to have accurate cost data when making those decisions.”
Through 2011, COLAs were only applied to the first $12,000 of retired public employees’ annual pensions in Massachusetts, not to the entire amount of the benefit. Legislation passed in 2010 allows local pension systems to raise the COLA base in $1,000 increments.
Massachusetts’s practice of only applying cost-of-living increases to a portion of pension benefits hurts those with larger pensions. Whereas a retiree with a $12,000 pension would see the COLA applied to his or her entire benefit, one receiving a $50,000 annually would see his or her pension lose ground to inflation over time, since more than three-quarters of the benefit would not increase.
While it might seem that those with smaller pensions need more help, many of them worked part-time or were public employees for a short period and have other sources of retirement income. The pensions of long-time public employees likely account for a much larger portion of their overall retirement income, meaning that losses from inflation could have a larger impact on their standard of living.
Thus far, 47 of Massachusetts systems covering 64 percent of all employees served by the commonwealth’s 103 local pension systems have increased their COLA base. Eighteen have raised the COLA base from $12,000 to $13,000, 29 have increased it to $14,000 or higher, and two have raised the base to $18,000, the maximum allowed by law.
In 2011, the commonwealth raised the COLA base for state employees and teachers to $13,000. The move increased the state’s pension liability by $286 million, according to the Public Employee Retirement Administration Commission.
Pensions are particularly important to public employees in Massachusetts. Since they do not participate in Social Security, state pensions often make up a larger portion of their overall retirement income.
Under Social Security, COLAs are calculated by applying the increase in the previous year’s cost of living index to benefits, but Massachusetts COLAs are not effectively tied to inflation. Local systems can grant COLA increases of up to 3 percent a year regardless of inflation.
Other recent pension research includes: Do We Need Them? How Many Retirement Boards are Necessary to Provide Pension Benefits for Massachusetts Public Employees, Improving the Investment Performance of Massachusetts Pension Funds, and Fiscal Implications of Massachusetts’ Retirement Boards’ Investment Returns.
MassPensions Update:
MassPensions.com allows visitors to compare and contrast the benefits and investment performance of Massachusetts’ 100+ retirement systems. We are pleased to announce our first update to the site, which will make it more user-friendly, accessible and informative.
WHAT’S NEW IN MASSPENSIONS 1.1
Convenience: We have added a new feature that allows users to find data by either retirement system or community/authority for those which are members of regional systems.
New data: We are publicizing information on cost-of-living adjustments at Massachusetts retirement systems in the new “COLA Base” tab, which shows the maximum amount of benefit on which COLAs are currently applied.
Dev channel: We are opening our development process further for comments from the public. You can now preview what we are working on at http://glimmer.rstudio.com/pioneer/dev/. Come back often and be sure to send us your feedback on usability, your ideas for new features and your requests for even more data!
COMING UP SOON
Sorting: When users opt to “display data tables” on the Overview tab, they will be able to sort information by column on key metrics such as the deadline by which assets will be sufficient to cover liabilities and the assumed rate of return for pension-fund investments.
Customization: Users will be able to customize the number of entries to display on all charts and graphs.
More data: The Financial Condition tab will include a separate chart showing each system’s unfunded liability.
Visualization: Interactive charts for members served, financial condition and investment performance will enable users to group by year and view year-over-year trends easily.
Pioneer Institute is an independent, non-partisan, privately funded research organization that seeks to improve the quality of life in Massachusetts through civic discourse and intellectually rigorous, data-driven public policy solutions based on free market principles, individual liberty and responsibility, and the ideal of effective, limited and accountable government.
