With the creation of the Special COLA Commission approved by Governor Maura Healey within the FY25 budget, it is a good time for us to review the history of the current public retirement COLA law and explain what we hope to accomplish through the work of the Special Commission. Since our founding in 1968, the COLA has always been a “bread & butter” issue for Mass Retirees. Added to the state’s retirement law in 1966, the COLA law has been amended 23 times since.
The last major update to the COLA law took place in 1997 with the passage of Chapter 17 – the so-called COLA Reform Law that Mass Retirees spearheaded.The new Special Commission is modeled on the 1996 Commission, on which the Association played a major role, that led to the successful passage of COLA Reform a year later.
The original 1966 law contained a provision allowing for a reduction in pension benefits in the event of a negative Consumer Price Index. This strange measure was repealed by the legislature roughly 18 months later, likely due to the political fallout associated with a potential reduction in benefits should a negative CPI occur.
Prior to 1971, only retirees with a pension below $6,000 received a COLA.Changing the law to allow ALL public retirees to receive a COLA was the first major legislative accomplishment of our Association. This also marked the beginning of the COLA base, which has gradually increased in small increments over the decades since.
Another major change in the state’s COLA law, also initiated by Mass Retirees, was the 1975 law that made COLAs a permanent part of a retiree’s pension. Prior to this change, the COLA was nothing more than a 1-time bonus payment sometimes referred to as a “13th check”. In most other states the COLA continues to be treated as a bonus payment – if any COLA is paid at all.
Following the passage of the voter approved Prop. 2 ½ law in 1981, and at Mass Retirees urging, the state took on the role of approving and funding COLAs for all public retirees. This responsibility continued until 1997, when the COLA Reform Law returned responsibility for the COLA to local retirement systems. The 102 local retirement boards, with the approval of the corresponding local legislative body, now set the COLA base.
For retired state employees and teachers (other than Boston teachers, who are members of the City of Boston Retirement System), the COLA base and the approval of the annual COLA are determined by the legislature and approved by the governor – traditionally through the annual State Budget.
A major factor in setting the COLA base is funding the benefit, which is a function of the pension funding schedules that nearly all public retirement systems must operate under. The funding schedule is the mechanism used to pay off unfunded liability, as well as to pre-fund the ongoing accrual of pension benefits by active employees (i.e.,normal costs). New benefits for existing retirees, which were not pre-funded as normal costs, are considered an unfunded liability that must be paid for within the parameters of the retirement system’s pension funding schedule.
Prior to the adoption of pension funding schedules in the late 1980s, the COLA was funded on a pay-as-you-go basis – much the same way that the Social Security COLA operates today. Under pay-as-you-go, the COLA is not pre-funded. The benefit is funded year to year through a budget appropriation, which can often lead to runaway unfunded liabilities and financial insolvency – two things that we must avoid when it comes to something as important as our members pension funds!
Since each COLA granted in Massachusetts becomes a permanent part of the retiree’s pension to be paid throughout the life of the retiree and surviving spouse, funding for the COLA must account for the length of time that the benefit will be paid. This same concept also applies to how the COLA is accounted for within the pension funding schedules.
Because the COLA is routinely granted by nearly all retirement systems, the funding schedules contain a baked-in assumption that an annual 3% COLA will be paid on the corresponding COLA base of the retirement system. In practice, this means that the funding schedule not only accounts for both new and accrued COLA payments for existing retirees, but also all future retirees.
This is the primary reason why the cost of increasing the COLA base is so expensive, particularly for the State and Teachers’ Retirement Systems. As of 2023, some 69,000 retirees and 86,000 active employees were members of the State Retirement System. Slightly larger, the Teachers’ Retirement System represents 70,000 retirees and more than 100,000 active educators (excluding Boston teachers, who are members of the City of Boston Retirement System). The Commonwealth’s FY25 budget appropriation to fund its share of the State and Teacher pension costs exceeds $4.5 billion.
Under the constraints of the current pension funding schedules for the State and Teachers’ Systems, the annual budget cost to increase the COLA base is $50 million per thousand-dollar increase. Each $1,000 increase also adds $500 million to the Commonwealth’s unfunded pension liability. In practice, this means that a modest increase in the COLA base from the current $13,000 (set in 2012) to $16,000 would increase the budget line item by $150 million and create some $1.5 billion in new unfunded liability.
A common question we receive, particularly from new retirees, is: “Why is the COLA not applied to my full pension?”. The simple answer: Because the cost of doing so is unaffordable and would bankrupt the retirement system.
As the history of the COLA and the funding of our public retirement system shows, the systems were not established with large COLA payments in mind. Over the years both the contributions from active employees and the government’s appropriation were designed to pay for the retirement benefits already on the books, based on the assumptions spelled out within the pension funding schedules. In order to accommodate full COLA benefits, employee contributions and that of the government would have had to have been much higher.
Given the fact that the funding of COLA benefits within the constricts of the current pension funding schedules is the main obstacle to increasing the COLA base, we envision that the schedules themselves will be a major focus of the Special Commission. While we do not know what shape the Commission’s recommendations will take, finding a new funding method or methodology is needed.
A full explanation of the pension funding schedule, including the various assumptions contained within the schedule, will be the focus of a future Weekly Update.
With very few exceptions, the 102 local retirement systems have done a commendable job in incrementally increasing the COLA base to help retirees keep pace with inflation. As we reported in last week’s Report, the local COLA base ranges from a low of $12,000 to a high of $30,000 – with the local average now just above $16,000. However, as the 20 local systems that increased the base for FY25 demonstrated, a growing number of systems have approached or exceeded the $20,000 threshold – placing the COLA base close to the average Social Security benefit received in Massachusetts (roughly $22,000).
It’s noteworthy that the state-wide $12,000 base, established by the 1997 COLA Reform Law, represented the average Social Security benefit received in Massachusetts at that time.
While we believe that the primary goal of the new Special COLA Commission should be to improve the base for State and Teacher retirees to a level more representative of the current average Social Security benefit, the recommendations issued by the Commission early in 2025 will undoubtedly have an impact on the local COLA as well. This is particularly true of any recommendations to create a new senior COLA benefit for long-term retirees (15+ years of service), as well as any suggested changes to the structure of the pension funding schedules.
Bottom line – ALL public retirees will ultimately benefit from the work of the Special COLA Commission, on which Mass Retirees has a seat at the table.
We hope that this review of the history of the COLA and how the benefit is funded is not only of interest to our members, but also provides context in terms of how we arrived at this point and where we hope to get to soon considering the historical constraints of the pension system.
With great appreciation,
Shawn
Shawn Duhamel
Chief Executive Officer
Mass Retirees Association