Inflation drives up pension fund spending

According to the National Association of State Retirement Administrators, nearly half of states link pension benefits for some or all of their retired workers to changes in the consumer-price index. With inflation reaching 7% in December, some retirement funds are now increasing pension checks by 3% or more for the first time in a decade. On others, board members or state officials are approving the cost of living outright.

“This is a hot topic,” said Keith Brainard, the association’s director of research. “A cost-of-living adjustment can be an expensive plan provision.”

Pension funds are facing a challenge shared by institutions and household savers alike: just as expectations of public market investment returns are waning, so are rising everyday costs. This year, many retirement systems will record a loss on living adjustments, rather than the annual windfall gains they’ve been seeing for years when inflation-linked growth fell below expectations.

For example, the $28 billion Los Angeles Fire and Police Pension System received a windfall of $264 million last year when the cost-to-life adjustment for pensioners came in well below the actuaries’ assumption of 2.75%.

This year, the system is likely to pay out tens of millions of dollars more than anticipated, with the fund’s cost-of-living adjustments likely to reach 7% for many beneficiaries. Pension ranges from 50% to 90% of the last pay.

Pension funds “used to be ahead; now suddenly they’re going to be behind,” said Joe Newton, pension market leader at Gabriel, Roeder, Smith & Co., an actuarial and benefits consulting firm. Russia’s attack on Ukraine is adding to inflation concerns.

In the nearly 30,000-person city of Windsor, Conn., the $84 million local pension fund is paying out about $410,000 a month in pension benefits to about 250 of its retirees this year, said finance director James Bourke. Of the approximately $63,000 that is due to the increase in cost of living incurred over the years, $5,000 is coming from a 1.3% increase in this year’s cost of living.

Next year, the increase in the cost of living will increase to 5.9%, which will be about $25,000 a month. The pension fund has taken several measures over the past decade to help keep costs down, Mr. Bourke said, including discontinuing the new employees scheme and increasing workers’ contributions.

Inflation can also add to pension costs down the road if it increases workers’ final wages, which are used to calculate their pensions.

To be sure, increased cost of living is only one component of the pension obligations that many funds face, and some states limit the cost by approving payments on a one-time basis. More than 430,000 beneficiaries of Texas’ teacher retirement system received up to $2,400 from the state’s general fund in January after the Texas legislature approved the measure.

But many other state pensions offer annual increases of up to 2% or 3%, sometimes more, according to the National Association of State Retirement Administrators’ survey of plans’ living provisions. Those growths can add up, especially if they’re compounded, meaning that one year’s growth becomes part of the basis on which the next year’s growth is calculated.

Indeed, since the financial crisis of 2007-09, more than 30 state pension systems have revised their cost of living adjustments in an effort to reduce costs, according to a National Association of State Retirement Administrators survey.

According to Pew Charitable Trusts’ fiscal year 2021 estimates, the state’s pension fund still has $740 billion short of what it needs to cover future benefit promises, even after a decade of stock gains increasing public pension coffers. happened. Funding paucity has prompted public officials to invest retirement savings in non-liquid private markets and has undermined the creditworthiness of some states and cities in the eyes of ratings firms, raising their borrowing costs.

Some pension funds that reduce or eliminate cost of living in an effort to control expenses are now experiencing pushback.

Retired Cincinnati teacher Elizabeth Jones has not received an increase in the cost of living since 2017 when Ohio’s state teacher retirement system suspended the increase due to a lack of funding. She is now running for a board seat on a platform that involves reinstating the annual cost-of-living increase.

“Everybody’s bills are going up, grocery bills, gas, you name it,” said Ms. Jones, president of the retirement chapter of the Cincinnati Federation of Teachers and a former high school English teacher and guidance counselor.

As of June 30, the pension fund had approximately $90 billion in assets and $105 billion in liabilities. According to the fund, teachers who retired in the past year had an average annual pension of $55,476 and a median age of 62.

A spokesman said board members are expected to vote in March on proposals for a one-time or two-time cost of living adjustment for some retirees. According to a publication by the board, the actuary of the retirement system, Cherone advised members to proceed with caution. The firm estimates that the one-time 2% cost-of-living increase would cost the fund about $1 billion.