Dennis Leone: Impact of COLA suspension

From Dennis Leone, April 12, 2012

IMPACT OF COLA SUSPENSION

I wish to weigh in on some things I have read recently regarding how a one-time COLA suspension would affect retirees. I checked with STRS staff yesterday to make sure my understanding was correct. Here is where things are, if the STRS Board suspends retirees' 3% COLA payment for one year, then ALSO reduces the COLA to 2% in future years:

If a teacher retired 10 years ago with a $40,000 pension, he/she has been receiving an uncompounded $1,200 COLA payment (3%) per year -- that applies only to the base $40,000 pension amount. This means that the retiree's current pension is $52,000 (10 X $1,200 + $40,000). If the COLA is suspended for one year, said retiree's pension would remain at $52,000 for one year because he/she would not receive the annual uncompounded $1,200 in Year 11. This is ALL the retiree loses due to the one-time suspension of the 3%. If the Board action is to provide a 2% COLA for the future after the one-time suspension, this means that said retiree's pension would increase each year by $800 instead of $1,200. In this illustration, the retiree's $52,000 pension would rise to $52,800 in Year 12, then rise to $53,600 in Year 13, and $54,400 in Year 14....and so on.

I think what many retirees are arguing is this: If the Board implements a one-time complete suspension of the 3% COLA, AND implements a 2% COLA effective one year later, the $40,000 retiree (who is now receiving $52,000) would receive zero in Year 11, then $800 in Years 12-20. The total impact if BOTH board actions occur translates to said retiree's total pension after 20 years becoming $59,200 instead of $64,000. A $64,000 pension for a $40,000 retiree, of course, assumes that nothing would ever change over the next 10 years and that all retirees somehow would still receive an uncompounded 3% COLA per year forever. This is not realistic.

All things considered, I believe we all realize that our lawmakers will require nothing less than a 1% reduction of the COLA long term. Given this certainty, I feel it is fairer for a $40,000 retiree to consider his/her "loss" from the one-time total COLA suspension as $1,200. Yes, said retiree will not receive another $4,800 over 9 years after the suspension due to a new 1% COLA reduction in subsequent years. But didn't all of us honestly expect a 1% reduction to happen anyway? The delay in implementing a 1% COLA reduction, and the fact that active teachers also are not yet paying more to STRS, have exacerbated the long-term solvency problem. An STRS Board member could argue, for example (if a new 2% COLA does not kick in until 2015) that the one-time suspension of the 3% COLA was a "catch-up" for the 3 years that our COLA remained at 3%. I certainly thought that a 1% COLA reduction would be in effect in 2011 or 2012.

The delay in a Legislature-approved final plan also will make it necessary for active teachers to have a locked-in 14% contribution rate in the future (which will match a local school board's 14% contribution rate). The previous Board plan -- which I argued did not go far enough -- did not lock in anything above 13% for active teachers. Also, a minimum retirement age of 60, plus the permanent elimination of the 35-yr/88% benefit, will become a reality. Politics will prevent the latter being eliminated as quickly as it should, which represents another complaint I have with the current plan. It always seems okay for the Board to make changes that IMMEDIATELY impact retirees, but not so when it comes to changing something affecting active teachers, like the 35-yr/88% benefit. OEA/OFT always will urge the Board to delay, delay, delay when it affects active teachers. I have never heard OEA/OFT suggest anything like that when it comes to the plight of current retirees.

Finally, I am of the opinion that while it is good that the Board's plan will do away with the 3-year final average salary (FAS) that establishes a retiree's baseline pension, and change it to a 5-year FAS, the FAS really needs to go to 7 years at some point in the distant future. (The Board will realize this as well at some point in the future, especially if the stock market goes south again.) A 7-year FAS in the future, in my mind, also would enable the board NOT to change the COLA status at all for the 30,000 retirees who retired with a pension of less than $30,000. These are our oldest retirees who have the least. There is a void of support for these individuals, and it always has been that way. It is wrong.

Dennis Leone
Former STRS Board Member (2005-2009)