Retiree Resource: Fall 2023
One of the benefits of being a LAGERS retiree is receiving an annual cost-of-living adjustment (COLA). LAGERS COLAs are designed to ensure retirees do not lose purchasing power over the course of their retirement due to inflation.
The statutes governing LAGERS provide for how and when the adjustment is made to your monthly benefit. Particularly in this current environment of high inflation, you might be interested in knowing just how your COLA is determined.
- LAGERS COLAs are effective October 1 of each year.
- To be eligible to receive a COLA, you must be retired a full 12 months (i.e., retired by October 1 of the preceding year).
- The amount of your annual COLA is based on the change in the CPI from June of the previous year to the June immediately preceding the October it will go into effect (i.e., October 1, 2023 COLAs will be based on the CPI change from June 2022 to June 2023).
- The purpose of the COLA is for retirees and beneficiaries to maintain purchasing power (to keep up with inflation).
- There is a statutory limit of 4% on annual COLAs. However, cumulative COLAs from the date of retirement are intended to ultimately equal 100% of cumulative CPI.
In the above example, when Consumer Price Index (CPI), which is the measure of inflation the LAGERS Board of Trustees uses to determine Cost of Living Adjustments, exceeds the 4% statutory cap, retirees only receive a 4% adjustment for the year. In the following year (year 2) the adjustment will be cumulative meaning it will include that year’s CPI adjustment, plus any ‘catch-up’ adjustment from the previous year (year 1).
As a result of the maximum annual increase allowed of 4%, for both 2021 and 2022 all retiree COLAs were capped at 4%. This compares to actual annual CPI increases of 5.39% and 9.06% for 2021 and 2022, respectively. For 2023 most COLAs will again be capped at 4%, with the exception of a small group of retirees receiving their first COLA (equal to the actual current increase of 2.97%). Therefore, currently all retirees are owed additional increases until reaching 100% of the applicable cumulative CPI measure. This can take some time depending on what future annual CPI increases are, LAGERS expects all retirees to be above 90% purchasing adjustment for the year. In the following year (year 2) the adjustment will be cumulative meaning it will include that year’s CPI adjustment, plus any ‘catch-up’ adjustment from the previous year (year 1). power following this years adjustment. As future annual CPI increases fall below 4%, additional progress can be made in catching all retirees up to full purchasing power.
Please remember that even though your COLA increase is capped annually, the methodology is intended to provide all retirees ultimately with 100% purchasing power while protecting the funding status of the LAGERS system. While more complex than many other retirement systems’ methods for granting COLAs, this method is based on sound plan design for the ultimate benefit of all LAGERS retirees.