Frequently Asked Questions - COLA

FAQs – COLA

Cost-of-living adjustment (COLA)
The COLA is one of the most expensive aspects of the current pension system (continuing to pay out a COLA may eventually deplete the pension fund if the 7.5 percent investment return assumption is not achieved). The RIRSA COLA provisions are the same for state employees, teachers, judges, municipal employees, public safety employees and state police. The law enacted November 18, 2011will suspend the COLA for all state employees, teachers, state police and judges until the plans’ funding level for all groups, calculated in the aggregate, exceeds an 80 percent funding level.  

The MERS COLA will be suspended for a municipal employee until his or her specific plan exceeds an 80 percent funded level. For all public employees with a suspended COLA, a COLA will be calculated and awarded at five year intervals during the suspension period. All COLAs will be calculated and awarded based on investment returns and will have a floor of 0 percent and a ceiling of four percent. The COLA will be awarded on a member’s first $25,000 (indexed) of pension allowance. 

Question: If the new law enacted November 18, 2011 suspends my COLA for a number of years, what reassurance do I have that the suspension will be “temporary”? In other words, will the COLA ever come back now that it is being suspended?

Answer:  For any member with a suspended COLA, the COLA will return at five year intervals until the suspension is lifted. The COLA suspension will automatically be lifted for all state employees, teachers, state police and judges when the plans’ funding level for all groups, calculated in the aggregate, exceeds an 80 percent funded level. The COLA suspension will automatically be lifted for all members of MERS upon their specific plan reaching an 80 percent funding level.

Question: How is the COLA connected to investment returns?

Answer: Under the law enacted November 18, 2011, the COLA is targeted at two percent and will be calculated by subtracting 5.5 percent from the state’s five-year average investment returns and will range from 0 to 4 percent. Currently, the state’s assumed investment return is 7.5 percent. So, for example, if a COLA is being provided and the investment fund performs at the five-year average of 7.5 percent, a COLA of two percent would be applied to retirees’ pensions. If the fund’s five-year average investment return is 9.5 percent, retirees would benefit from a higher-than-assumed investment return and receive a COLA of four percent. But if the fund returns five-year investment gains of less than 5.5 percent, there would be no COLA awarded.

Question: Under the law passed November 18, 2011, when would the COLA suspension take effect for all retirees in a system that is not 80 percent funded?

Answer: July 1, 2012.

Question: Under the law passed November 18, 2011, would I receive a COLA in January 2012 in accordance with current plan rules?

Answer: Yes.

Question: Will past COLAs that I have received before July 1, 2012 be removed from my pension check?

Answer: No. You will continue to receive every COLA that you have accrued as of June 30, 2012. As of June 30, 2012 your check will remain unchanged.

Question: Could my check be less than it is now because of the COLA suspension?

Answer: No. Your pension check will not be reduced if the COLA is suspended and it will never be less than it is now. For example, if you receive $1000 each month and $100 of your check is from previously received COLA increases, you will continue to receive $1000 each month.

Question: I'm a retired teacher and I do not receive Social Security. My pension check is my primary income. Under the law enacted November 18, 2011, would the temporary suspension of the COLA apply to me?

Answer: Yes. The COLA will be suspended for all state employees, teachers, judges, and state police until the funding level for all groups calculated in the aggregate exceeds 80 percent.  The COLA for each MERS plan will be suspended until the specific plan exceeds an 80 percent funding level.   

Question: I’m a judge and my COLA is based upon my total pension check. When the COLA returns and is tied to investment performance, will it be applied to my total pension earnings like it is now?

Answer: No. Under the new plan all employees, including judges, will earn a COLA on the first $25,000 (indexed).

Question: I made retirement decisions based on the COLA. Now that the state has suspended the COLA, can I now choose a different retirement option?

Answer: Under the law enacted November 18, 2011, a member who elected an annuity option with a survivor benefit has the option of changing his or her benefit to a life annuity option by June 30, 2013, provided that his or her beneficiary is still living. All other retirees will not be allowed to change their benefit options other than in accordance with current plan rules.

Question: You have said the COLA applies to a $25,000 maximum which is indexed. How does the index work?

Answer: The index increase is calculated in the same manner as the COLA. Each year, the actuary will calculate the average five year investment return and subtract 5.5 percent. The resulting percentage, targeted at 2 percent but with a 4 percent maximum and 0 percent minimum will be applied annually to increase the $25,000 amount.