First in a series
COLA’s Impact on Employee Purchasing Power
(Editor’s Note – The Addison City Council voted NOT to pay a cost-of-living increase to retired employees in 2016. This series will explain WHY a COLA is important and how it impacts retired employees. It has been prepared by former and current employees and local residents who are knowledgeable about the issue.)
Why is a COLA important to retirees? The intent of a COLA (cost of living allowance) is to keep retirees’ retirement income (or purchasing power) protected from the effects of inflation.
Here’s an example with a COLA adjustment: Firefighter A retires when his monthly pension reached $3000 dollars per month. He has reviewed the data and discussed it with his family. They are convinced that, based on their standard of living, a monthly pension of $3000 per month will sustain them through their golden years. The 70% COLA adjustment that has been provided by the Town since the pension plan was established and is designed to keep his pension within 70 % of the cost of inflation from the retirement date forward. At the 70% COLA adjustment, the retired fire fighter is still losing 30% to the cost of inflation over time.
In contrast, Social Security law provides 100% of the cost of inflation as do some other pension systems. More than 30 years ago, the Town of Addison asked employees to opt out of Social Security and to rely, instead, on the Town’s retirement system. This COLA application at the 70% rate helps the retired employee keep up with the majority of inflation without the Town carrying the entire load. A measured conservative approach. Now, let’s look at the same example without the COLA. Firefighter A retires with a pension of $3000 per month. He is blessed and lives another 30 years. Long term rates of inflation have been at or about 3%. In recent years, inflation has been held in check at lower levels and it is thought that the new long term rate may be around 2.5%.
For this example, we will use both of these. At the end of his life at the 30-year time frame, he has lost 75 to 90 percent of the value of his retirement. At the 3% inflation rate his pension income in 30 years would have the value of about $300 per month . At the 2.5% rate the value his pension income in 30 years would be about $750 per month.
In retrospect (too late for this firefighter), would the firefighter have made the decision to retire knowing that the purchasing power of his pension could drop as low as $300 a month or $750 a month? What would he have done? Worked longer in a hazardous position staying on the job long after his body would let him do the job? Maybe. Or, as we have seen the past few years, he would have left Addison early in his career after learning the basics of the pension system and letting Addison pay for his training and the experience he has developed to take that skill and knowledge to another community who rewards their employees for length of service.