Understanding Your Retiree COLA
One of the great benefits of your SLOCPT pension benefit is the Cost-of-Living Adjustment (COLA), an annual increase designed to help your pension keep up with rising prices while in retirement. We all know that a dollar today doesn’t stretch as far as it did a few years ago. Just think back to 2000, a loaf of bread cost around $1.00. Fast forward to today, and that price has doubled. This gradual rise in costs, known as inflation, erodes purchasing power over time. Without an adjustment, your benefit that once covered all your essentials could fall short. That’s where COLA comes in - it helps ensure retirees can keep up with rising costs.
How Does COLA Work?
Each year, SLOCPT determines the COLA based on the average change in the Consumer Price Index (CPI) for the Los Angeles and San Francisco metro areas for the past two years. This index tracks the cost of everyday goods and services, things like food, fuel, housing, and medical care, to measure how much prices have increased over the past year. But there are limits on how much of an increase retirees receive, depending on their retirement Tier:
Tier 1: Maximum COLA of 3.0% per year, plus a COLA bank feature. If inflation is over 3% in a given year, the excess amount can be stored in a COLA bank and used in future years when inflation is lower.
Tier 2 and Tier 3: Maximum COLA of 2.0% per year, with no COLA bank. Retirees in these tiers receive an increase of only up to 2%, even if inflation is higher.
COLA increases take effect each year on April 1st for retirees who were retired on or before January 1st of that year
While COLAs have historically been calculated as increases to benefits with positive inflation, the Plan also allows for decreases should there be deflation in the CPI data.
Why Does COLA Matter?
Without COLA, the value of your fixed pension benefit would gradually decline as the cost of living rises. For example, if inflation averages 3% per year, the cost of living could double in about 24 years, meaning a pension without adjustments would buy half as much as it did at retirement.
Consider a retiree receiving a $3,000 monthly pension today. Without COLA, that same $3,000 might only have the purchasing power of $1,500 in two decades. COLA doesn’t necessarily keep up with inflation perfectly, but it provides a crucial safeguard to help retirees maintain their financial stability.
Planning for the Future
Understanding how COLA works is an important part of retirement planning. While COLA helps protect against inflation, it does have limits, particularly for Tier 2 and Tier 3 retirees who do not have a COLA bank. Employees should also consider other financial factors, such as personal savings, Social Security, and healthcare costs, to ensure long-term financial security – Cheers!
New Website!
SLOCPT now has its own dedicated website, designed to provide easier access to important updates and resources. Visit us at www.slocpt.org for all the latest information. If you previously visited us on the County’s site, be sure to update your bookmarks!
Katie Girardi, Executive Director
San Luis Obispo County Pension Trust (SLOCPT)
805-781-5465 SLOCPT.org