Pensions

By Ed Mendel
March 21, 2016

Social Security recipients get no raise this year because inflation last year was near zero. But more than half of CalPERS pensions will get a raise in May of 1.5 to 4 percent.

How does this happen, when both Social Security and the California Public Employees Retirement System have annual cost-of-living adjustments based on the rate of inflation?

“The law does not permit an increase in benefits when there is no increase in the cost of living,” Social Security recipients were told of the federal program‘s rules. “So your benefit will stay the same in 2016.”

That seems simple and straight forward. In contrast, the CalPERS method for a cost-of-living adjustment, even though its inflation index shows little or no inflation this year, seems almost comically convoluted.

A CalPERS report last week said its cost-of-living index (CPI-U for all urban consumers) increased only 0.12 percent last year, far below the one percent threshold needed to trigger a cost-of-living adjustment for the year.

CalPERS plans also have a cap on the amount of the annual cost-of-living adjustment, 2 percent for about 95 percent of retirees. When inflation is below the threshold or above the cap, the inflation not used for an adjustment can be “banked” and applied in future years.

The report gave an example of what happens when inflation is below the threshold: “In the future, when the inflation rate exceeds one percent, the 0.12 percent increase retirees did not receive in 2016 will be factored in to that year’s adjustment.”

When asked to clarify the cost-of-living adjustment policy at a board meeting last week, Anthony Suine of the CalPERS staff gave an example of what happens when inflation is above the cap.

“In the early 2000s when inflation was much higher than the 2 percent, for instance, that banked up,” Suine said. “So when it has been lower, the retirees who have been retired for longer were still seeing the benefits of that banked up cost-of-living adjustment.”

Now after several years of low inflation, he said, anyone that retired after 2005 does not have enough in the bank to reach the 1 percent threshold needed for a cost-of-living adjustment.

As a result, about 45 percent of CalPERS retirees will not receive a cost-of-living adjustment this year. But 55 percent of the retirees will begin to receive a cost-of-living adjustment in their monthly payment in May, most getting a 2 percent increase. (see chart)

State and school workers are among the 95 percent of retirees in plans with a 2 percent cap on the annual cost-of-living adjustment. The rest are local governments: 67 plans with a 3 percent cap, 12 plans with a 4 percent cap, and 38 with a 5 percent cap.

To get a cost-of-living adjustment in one year that is as high as the plan’s cap, inflation in the previous year would have to be as high as the cap.

“The cost-of-living adjustment is limited to the lesser of two compounded numbers — the rate of inflation or the cost-of-living adjustment contracted by the employer,” said the report.

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