Retirement & Financial Planning Report

While proposals to impose reduced cost of living adjustments—or “diet COLAs”—in federal retirement have been set aside and retirees are set to receive a full adjustment in January, the same is not true of employees of many state and local governments, whose retirement systems in many other ways mirror that of the federal government.

That’s the conclusion of the Center for Retirement Research, which said that between 2010 and 2013, 17 states, with a total of 30 plans, enacted legislation that reduced, suspended or eliminated COLAs for current workers, retirees or both.

“Cutting COLAs is an extremely attractive option to plan sponsors, because it is virtually the only way to make large reductions in a plan’s unfunded liability. Reducing benefits for new hires or even future benefits for current employees – if legally possible – lowers future pension costs but has no effect on the existing liability. The existing liability represents benefits already earned, including promised COLAs. To the extent that the cost of future COLA payments is embedded in the liability estimate, cutting COLAs reduces the unfunded liability,” it said.

For example, one state essentially eliminated retiree COLAs for the foreseeable future by deciding not to pay them until its retirement plan funding reaches a level well above its current level—and at that point it will be up to a committee to decide whether to reinstate it.

And six states with COLAs linked to a consumer price index measure, as is the federal retirement COLA, lowered their formulas.

The report noted that the impact is somewhat softened in plans that have Social Security as an element—comparable to the situation of FERS—since full COLAs continue to be paid in that program. But it said the impact is fully felt by retirees in programs that don’t include Social Security—comparable to the design of CSRS.