COLA came up in a conversation I had with Steve Mitchell. He said removing or reducing COLA would go a long way toward fixing financial problem when amortized over a 30 year period. After we hung up, my first reaction was well that would not be too bad considering the situation.
Then, it hit me. I subtracted my original retirement benefit from my current retirement benefit and that gave me the first clue that COLA is no small thing. We did various calculations to obtain the financial impact for a single retiree.
We calculated it three ways: a mathematical partial sums formula; a year by year spreadsheet calculation; and a year by year paper and pencil method. It was calculated for twenty five years and we about fell over when we saw how much it would cost a retiree. Had several others verify the results.
Our reaction was that it would be terribly unfair to put a substantial burden of fixing the financial problem on the retirees through COLA sacrifices when we have already suffered substantial loss due to the increases in health care premiums.
COLA does not compound, but it does accumulate yearly.
Please bear with me as I do best I can to explain. It is so hard to do on an email. Would do much better job in person with a chalkboard.
As an example, consider an original retirement benefit of $40,000 and a COLA of $1,000.
That $1,000 COLA is not correct because 3% of $40,000 would be $1,200 but it will be easier to follow and save me a lot of calculating to use $1,000.
Year 1, you would receive $1,000 COLA and now get $41,000. That is $1,000 more for Year 1.
Year 2, you would receive $1,000 COLA and now get $42,000. That is $2,000 more for Year 2.
But, if you add additional amounts for Year 1 and Year 2, you have received $3,000 more to date for the two years..
Year 3, you receive $1,000 COLA and get $43,000. That’s $3,000 over your original $40,000 for Year 3.
So after 3 years of COLA, I have received $43,000 + $42,000 + $41,000 for a total of $126,000 instead of $40,000 + $40,000 + $40,000 for a total of $120,000. Over the 3 years, addition of COLA has added $6,000 to my lifetime benefit.
Year 4, you receive $1,000 COLA and get $44,000. That’s $4,000 over original $40,000 benefit for Year 4.
So after 4 years of COLA, I have received $44,000 + $43,000 + $42,000 + $41,000 for a total of $170,000 instead of $40,000 + $40,000 + $40,000 + $40,000 for a total of $160,000. Over the 4 years, addition of COLA has added $10,000 to my lifetime benefit.
Year 5, you receive $1,000 COLA and get $45,000. That’s $5,000 over original $40,000 benefit for Year 5.
So after 5 years of COLA, I have received $45,000 + $44,000 + $43,000 + $42,000 +$41,000 for a total of $215,000 instead of $40,000 + $40,000 + $40,000 + $40,000 + $40,000 for a total of $200,000. Over the 5 years, addition of COLA has added $15,000 to my lifetime benefit.
Year 6, you receive $1,000 COLA and get $46,000. That’s $6,000 over original $40,000 benefit for Year 6.
So after 6 years of COLA, I have received $46,000 + $45,000 + $44,000 + $43,000 +$42,000 + $41,000 for a total of $261,000 instead of $40,000 + $40,000 + $40,000 + $40,000 + $40,000 + $40,000 for a total of $241,000. Over the 6 years, addition of COLA has added $21,000 to my lifetime benefit.
After 25 years of receiving $1,000 per year of COLA, I will be receiving $65,000 instead of my original benefit of $40,000. The year before, I received $64,000 instead of $40,000. The year before that I received $63,000 instead of $40,000 etc.
Working backwards, lifetime COLA benefit would amount to 25K + 24K + 23K + 22K + 21K + 20K + 19K + 18K + 17K + 16K + 15K + 14K + 13K + 12K + 11K + 10K + 9K + 8K + 7K + 6K + 5K + 4K + 3K + 2K + 1K
The TOTAL IS $325,000.
Sorry for all the text, I am doing the best I can to explain it.
I don’t have access to all the STRS statistics but from the website financial information, a 1% reduction of COLA for the number of retirees we have would be huge over 30 years.
We estimate approximately 10 billion and if you consider that amount would stay invested instead of paid out to the retirees and if it only returned 3% or 4%, it would probably be at least 15 billion. It’s only numbers and there are 3 or 4 of us that if we have access to all the information, we could probably figure it out much more accurately.
We are not financial experts, but we are math guys. As you well know, projections for a situation such as a retirement fund are based on formulas and actuarial data. If we had the statistics, it’s only a matter of plugging them into the correct formulas to obtain the results. The problem is that those formulas can make it look worse or better dependent on the data used.
Furthermore, you could present different conclusions from the results.
If someone wanted to downplay the financial impact of COLA, he could make the statement, the average retiree would only lose $1,000 per year and ignore the accumulating effect.
If someone wanted to emphasize the long term effect of COLA, he could make the statement that a retiree could lose $325,000 by presenting the lifetime impact.
I hope I have clarified the issue. Please send me any questions you may have concerning any confusion I have may have caused.
Once again, thanks ever so much for your time and consideration. I truly appreciate it.
Mario Iacone is a retiree from Youngstown who is involved with a group of about 50 (and growing) retirees who are sending out e-mails around the state to educate other retirees about what is happening with their pension funds at STRS. They are just now hearing about CORE. More power to you, Mario!! We're all in this together. KBB