The Prevalence of COLA Adjustments in Public Sector Retirement Plans
State and local employees comprise a significant proportion of the workforce and are largely covered by defined benefit pensions. Many of these retirement plans have been facing funding gaps, but legal restrictions often prevent them from reducing benefits for current employees. However, retirement plans can reduce liabilities by changing cost-of-living-adjustments, or COLAs, which are commonly applied to benefits each year to allow retirees to maintain purchasing power in retirement. In this study, we examine the prevalence of COLA adjustments in public sector retirement plans through original data collection for 49 plans in 30 states, which cover approximately 52 percent of public sector workers overall. Among this sample, on average 45 percent of workers each year experienced some change in COLAs between 2005 and 2018, with more than half of these workers experiencing negative changes. We consider stylized examples of public sector workers subject to reductions in COLAs to understand how COLA adjustments may affect workers’ retirement decisions. Our analysis suggests that eliminating a 3 percent COLA could delay retirement of affected workers by approximately 4.5 months.
We would like to thank Rene Crespin, Fiona Qiu, Francesca Vescia, and Linda Ye for exceptional research assistance and seminar participants at the Social Security Administration for helpful feedback. The research reported herein was performed pursuant to grant RDR18000003 from the US Social Security Administration (SSA) funded as part of the Retirement and Disability Research Consortium. The opinions and conclusions expressed are solely those of the author(s) and do not represent the opinions or policy of SSA, any agency of the Federal Government, the authors’ institutions or NBER. Neither the United States Government nor any agency thereof, nor any of their employees, makes any warranty, express or implied, or assumes any legal liability or responsibility for the accuracy, completeness, or usefulness of the contents of this report. Reference herein to any specific commercial product, process or service by trade name, trademark, manufacturer, or otherwise does not necessarily constitute or imply endorsement, recommendation or favoring by the United States Government or any agency thereof.