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Tuesday, October 16, 2012

A COLA comparison: PSPRS vs. Social Security

The Social Security Administration (SSA) announced that Social Security (SS) recipients will be receiving a 1.8% cost of living allowance (COLA) starting January 1, 2013.  SSA awards a COLA each year to keep recipient benefits even with inflation.  SSA calculates this COLA based on the Consumer Price Index for Urban Wage Earners and Clerical Workers, which the Bureau of Labor Statistics bases on the prices of a representative group of goods and services.

As has been detailed before here (Have a COLA and a smile), PSPRS has used a different method to calculate COLA's for its beneficiaries.  PSPRS places a portion of earnings in excess of its annual expected rate of return into a Reserve for Future Benefit Increases.  As long as funds remain in this reserve, an annual COLA is paid.  The recent pension reform legislation will eliminate this method, and once the Reserve for Future Benefit Increases is exhausted a new formula will be used to calculate COLA's in the future.

The following chart gives a comparison of how much a PSPRS member and a SS recipient would get with their respective COLA's.  The $1,433.00 monthly benefit used is based on the maximum Social Security monthly benefit in 2000.  PSPRS members are awarded a fixed COLA, regardless of their monthly benefit, while SS applies a COLA as a percentage of the recipients monthly benefit. The COLA amounts are what would be included in the next fiscal year's checks, so for PSPRS members, they would have begun receiving their 1986 COLA starting July 1, 1985, while SS recipients would have begun receiving their 1986 COLA starting January 1, 1986.

Year      PSPRS Member     COLA     SS Recipient    Rate/COLA
2000     $1.433.00                  $93.24     $1,433.00          3.5%/$50.16
2001     $1,526.24                  $98.17     $1,483.16          2.6%/$38.56
2002     $1,624.41                  $102.53   $1,521.72          1.4%/$21.30
2003     $1,726.94                  $111.90   $1,543.02           2.1%/$32.40
2004     $1,838.84                  $116.82   $1,575.42           2.7%/$42.54
2005     $1,955.66                  $121.76   $1,617.96           4.1%/$66.34
2006     $2,077.42                  $127.06   $1,684.30           3.3%/$55.58
2007     $2,204.48                  $134.34   $1,739.88           2.3%/$40.02
2008     $2,338.82                  $138.66   $1,779.90           5.8%/$103.23
2009     $2,477.48                  $146.74   $1,883.13           0.0%/$0.00
2010     $2,624.22                  $152.84   $1,883.13           0.0%/$0.00
2011     $2,777.06                  $153.58   $1,883.13           3.6%/$67.79
2012     $2,930.64                  $120.00* $1,950.92           1.7%/$33.17
2013     $3,050.64                      **        $1,984.09                    ?

Cumulative COLA's              $1,617.64                                $551.09

* This monthly benefit amount was approved for the July 2012 payment to PSPRS beneficiaries but may be changed after final investment results are calculated.
** No adjustment under the old method as the Reserve for Future Benefit Increases should be exhausted.  Any potential COLA will be based on funding ratio as well as the prior year's rate of return.  This change is being challenged in court.

After 13 years a PSPRS member will be earning over $1,000 per month more than someone receiving Social Security.  The starting $1,433 per month figure was used because it was the maximum monthly SS payment in 2000.  This meant that if you had worked from the age of 21 to 65, all while earning Social Security's taxable maximum, the most you could receive was $1,433 per month once you turned 65.  For a 55-year-old PSPRS member who retired with 20 years of service before fiscal year 2000, his high three-year average salary would have been only $34,392.  So for a PSPRS retiree, $1,433 per month amount  would seem to be an unusually low amount.

However, even if we used a more realistic $3,000 per month benefit, this member would still be making more than 50% more per month in FY 2013 than he did in FY 2000.  These annual increases in benefits certainly stretch the definition of cost of living allowances and could more accurately be termed raises.  COLA's are meant to prevent retirees from losing money as inflation raises prices.  Enriching retirees is not the purpose of COLA's.

We also need to keep in mind that between 2000 and 2011 there were two major market downturns, and PSPRS went from being well over 100% funded to being only 61.9% funded.  Forgone pay raises, decreased promotions, furloughs, and higher contribution rates all have been experienced by those still working and paying into PSPRS.  With PSPRS in such dire financial straits, it is a bizarre system where retirees get raises and workers earn less.

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