As Mass Retirees members know, the Special COLA Commission is now reviewing steps that can be taken to improve COLA benefits.
Created at the behest of our Association within the outside sections of the FY25 Budget, the Commission’s mandate is focused on three main areas: Increasing the COLA base for members of the State and Teachers’ Retirement Systems; developing a new enhanced or “senior” COLA benefit to be paid to long-term retirees in addition to the traditional annual COLA; and studying new methods to fund COLA benefits within the long-term pension funding schedules.
After several meetings since the nine member COLA Commission’s organizational meeting in January, the Commission members have been reviewing various analyses provided by PERAC Actuary John Boorack.
Chairman of the Commission and Exec. Director of PERAC Bill Keefe has led discussions of the review of these analyses. Such discussions have resulted in a focus of improving the current COLA base of the State and Teachers’ Retirement Systems. In addition, there seems to be a growing interest in developing a proposal to help longer-term retirees. Commission members have seemed to direct their comments on the analysis and cost estimates towards these two issues of COLA improvements.
Over the past several years, Mass Retirees has made an increase to the current state COLA base of $13,000 (established in 2012) the center of discussion surrounding pension benefit improvements. However, any increase to such base with only ten years remaining in the Commonwealth’s funding schedule carries significant annual estimated increases to the pension funding schedule. These cost estimates have been confirmed through the work of the Commission. However, a means to finance such increases with excess investment earnings has brought about much discussion.
Unfortunately, accessing prior funding schedule’s excess earnings is not something possible for a future pension funding process. So, attempting to put a permanent policy in place to set a portion of future excess gains aside to raise the COLA base level has been center of most recent meeting discussions.
“It is only right that the investment success of our public pension funds be shared with retirees. After all, public pension funds exist in a trust that belongs to the beneficiaries of the system. With full funding now within reach, a more equitable system needs to be established,” said Mass Retirees President Frank Valeri, who serves as the Association’s designee on the COLA Commission. “The policy that has really taken shape as a major focal point for the Commission is the need for an additional benefit for long-term retirees. The evidence the Commission has developed proves that once someone has been retired for ten years or longer, inflation has significantly reduced purchasing power.”
Beyond the need increase the State and Teacher Retirees COLA base, what has seemed to be developing amongst the 9-commission members is a willingness to recommend a proposal to help long-term retirees obtain more immediate relief from the high inflationary period they have just experienced. A new proposal may evolve from the Association’s legislation which seeks to help long time, lower paid retirees with increased annual COLA payments. An expansion of this proposal has been discussed at its recent meetings to provide more immediate relief.
BALANCING SHORT & LONG-TERM COSTS
Since the late-1980s, when modern pension funding took hold, retirement benefits shifted from a pay-as-you-go basis to needing to be properly funded through the pension funding schedule of each retirement system. In practice, this means that any time new benefits are approved those benefits must not only be properly accounted for but also paid for.
COLA benefits are paid for through each retirement system’s pension funding schedule, which is funded through three sources: Employee payroll contributions; the employer’s contribution; and the investment returns generated by those combined contributions. As defined benefit pension systems, the employer (state or local government) is responsible to cover any shortcomings the system may experience over the life of the pension fund – as a government entity, the life of the fund is infinitely in perpetuity.
With a few notable exceptions (Wellesley, MassPort, MWRA, MassHousing), most MA public pension funds did not adopt funding schedules and begin to properly fund our public pension systems until the late 1980s. The 40-year pension funding schedules adopted in 1988 were designed to pay-off decades of accumulated unfunded liability by 2028. Following the Great Recession in 2008-09, the funding deadline was moved out to 2040. However, the Commonwealth along with the majority of the 102 local retirement systems will be fully funded by 2036 – if not sooner.
What this means for COLA benefits is that anytime the COLA base is increased, or a benefit is paid that goes beyond current benefit levels (2022 5% COLA), the new unanticipated benefit increase must be properly accounted for and funded within the structure of the system’s funding schedule. For example, each $1,000 increase in the State/Teacher base results in over $500 million in new unfunded liabilities that must be fully paid for by 2036 – the current funding deadline for the State and Teachers Retirement Systems. Part of the reason why the liability is so high is that the schedule must assume that all current and future retirees will receive the same COLA benefit.
To pay-off the unfunded liability created by the new COLA benefit, two funding sources are tapped: Excess investment returns and/or increased State Budget appropriations (for FY26, the state’s pension appropriation is $4.9 billion). Again, using the State/Teacher COLA base as an example, a $1,000 increase in the current base would add over $60 million to the FY26 appropriation.
However, early estimates indicate that the creation of an enhanced COLA benefit for long-term retirees could prove to be far less expensive.
“While the Commission still has work to do, early indications are that the cost of creating a new enhanced COLA for long-term retirees could be far less than even minor increases to the traditional COLA base. The reason for this appears to be two-fold. First, due to the nature of the new benefit the number of eligible retirees is naturally a small group and would continue to decrease within each phase of the added benefit (ie, retired for 10, 15, 20 years). Second, there does not appear to be an actuarial requirement to pre-fund the enhanced COLA for future retirees,” continued Valeri.
“My hope is that the Commission will consider addressing the COLA in two ways. First, developing a recommendation to routinely increase the State and Teacher COLA base over time using a portion of future excess investment returns. Next, recommend the immediate creation of a new enhanced COLA benefit that will be applied in steps and paid in addition to the traditional COLA. For example, someone retired for 10 years would receive an extra $100 a year. At 15 years, you will receive and extra $150, and at 20 years of retirement an extra $200.”
While the details must be developed by the Commission, the general philosophy behind the enhanced COLA is that it would apply to longterm retirees who were career public employees. Further, to qualify the long-term retiree must also receive a pension benefit that is at or below the benchmark established by the Commission.
“To be clear, the concept behind the enhanced COLA is to benefit those retirees who need the most help. In many cases, these would be career public workers who qualify for little if any Social Security benefit and retired with modest pensions,” added Valeri.
The Special COLA Commission will likely file its report and recommended changes to the Legislature in early fall.