Explanation of the 4 versions of the COLA tree

From John Curry, March 20, 2010
COLA trees from Bob Buerkle, March 18, 2010

After one year of retirement you currently qualify for a 3% COLA. On your first anniversary you get one COLA amount, divided equally over 12 monthly payments. The single DOT at the top of the tree represents that one COLA amount. After two years you get two COLA amounts, or twice the first year amount, thus the two DOTS in the second row. After 10 years you can see that there are 10 DOTS in that horizontal row, thus your pension has one new COLA amount added to the 9 that you had accumulated through the previous year. After 33 years your original pension amount has grown by 99% and after 34 years it will have grown by 102%.

Example #1 shows the current 3% Simple COLA used by STRS.

Example #2 shows the losses our retirees will incur over a 33.3 year period with a 2% COLA.

Example #2b shows the same losses as Example #2, but with a three year deferral and a minimum of age 60. Example #2b losses become much greater if you retire at age 56, 55, 54, etc. with a minimum age 60 COLA requirement. (This is the HPA proposal)

Example #3 shows the losses our retirees will incur with a 1.5% COLA

In total there are 33 and one-third horizontal rows. I chose that number because that is how long it takes to double the amount of your original pension with a "Simple COLA". It also turns out to represent the normal life expectancy of a female who retires around age 53/54. The COLA is critical in order to have your pension stay close to your original purchasing power. Even with a 3% COLA our retirees will fall behind in purchasing power if inflation is repeated at the same rate we incurred over the last 35 years, going forward for the next 35 years, and I expect inflation to be worse going forward.

If STRS provided a 3% compounded COLA, your original pension amount would double in 24 years. The Consumer Price Index (CPI) always reflects compound interest. This is why our retirees are always falling behind in their purchasing power. To put this into perspective, some of the teachers who retired in the early 1970's had fallen behind in their purchasing power by 25-30% by 1999. Senate Bill 190 recalculated all retirees to a 2.1% pension formula if they had retired on a lesser formula. If that did not bring their lost purchasing power up to at least 85% of their original purchasing power an additional amount was also added to their pensions to get them there.
Click images to enlarge.

............................................................