Cost-of-Living Adjustments

Cost-of-living adjustments (COLAs) in some form are provided on most state and local government pensions. How public pension COLAs are calculated and approved varies considerably.

Approximately three-fourths of pension plans sponsored by states and local governments provide some form of an automatic cost-of-living-adjustment (COLA), i.e., one that does not require specific approval of or action by the plan sponsor (the legislature or city council). Other types of COLAs among plans in the public sector are ad hoc COLAs, which are increases to annuitants’ benefits resulting from specific action by the plan sponsor; and investment-based COLAs, which increase annuitants’ benefits when the pension fund’s investment performance surpasses a designated benchmark.

COLA Basis

The purpose of the COLA is to offset, or reduce, the effects of inflation on an individual's retirement income. 

The Bureau of Labor Statistics measures inflation by calculating the Consumer Price Index for Urban Workers (CPI-U), which measures changes on prices paid by urban consumers on representative goods and services. The chart below plots the most recent inflation data.

20-Year Breakeven Rate, Federal Reserve of St. Louis


COLA reforms affecting active or retired plan participants

In the wake of the 2008-09 market decline, many states have altered their COLA provisions for newly-hired workers. Some states altered COLA provisions to also affect retired members, active members, or both. These states include Colorado, Florida, Maine, Maryland, Minnesota, New Jersey, New Mexico, Oregon, and South Dakota. Information about these and other reforms made to public pension plans is available here.

NASRA Resources

Other Resources


Become A Member

Becoming a member of NASRA offers a unique opportunity to join a community committed to the sound, efficient, and innovative stewardship of public retirement systems. Membership connects you with a network of professionals and experts, providing valuable insights into managing public retirement systems with a focus on sustainability and risk-averse strategies.

By joining NASRA, you gain the tools and resources to enhance the management of public retirement systems, ensuring their long-term success and reliability for generations to come.


 

What's New at NASRA: Latest Update on Employee Contributions to Public Pensions

NASRA updates six key briefs annually on public pension management. The latest focuses on employee contributions to public pensions. Unlike private sector pensions, state and local government employees contribute to their retirement benefits, a crucial practice for stable pension funding. Post-2008 financial downturn, many plans increased these contributions. This brief examines the contribution plans’ design, policies, and trends, underlining their importance in pension sustainability.