Tuesday, August 28, 2012

“Cost‐of‐Living Adjustments” (COLA) from the National Association of State Retirement Administrators


“The purpose of a COLA is to offset, or reduce, the effects of inflation on retirement income… Most state and local governments provide a COLA for the purpose of offsetting or reducing the effects of inflation, which erodes the value of retirement income... This depreciation can affect the sufficiency of retirement benefits, particularly for those who have no means to supplement their income due to disability or advanced age.
“Social Security beneficiaries are provided an annual COLA to maintain recipients’ purchasing power. Similarly, most state and local governments provide an inflation adjustment to their retiree pension benefits. This is particularly important for those public employees – including nearly half of public school teachers and most public safety workers – who do not participate in Social Security.

“Unlike Social Security, however, state and local retirement systems typically pre‐fund the cost of a COLA over the working life of an employee to be distributed annually over the course of [a retiree’s] lifetime…

 “[The] distinction between [compound and simple] COLA types is whether the increase is applied in a simple or compound manner. Under a simple COLA arrangement, each year’s benefit increase is calculated based upon the employee’s original benefit at the time of his or her retirement. Under a compound COLA arrangement the annual benefit increase is calculated based upon the original benefit as well as any prior benefit increases. Some COLAs are both, in that they may be 'simple' until the retiree reaches a certain age or year retired, at which point COLA benefits are calculated using a compound method…

“As part of efforts to contain costs and to ensure the sustainability of public pension plans, and in response to the current period of historically low inflation, many states recently have made changes to COLA provisions by adjusting one or more of the elements mentioned above…

“Since 2009, eleven states have changed COLAs affecting current retirees, five states have addressed current employees’ benefits, and six states have changed the COLA structure only for future employees. The legality of these modifications in several states has been, or is, being challenged in court...”

Commentary:
As stated by John Stevens, Legal Consultant for the “We Are One” Labor Coalition, “to take away the Cost-of-Living Adjustment for retirees is not a free and fair choice. It is a coercive choice under duress.” In other words, duress (or coercion) is a vitiating factor. Legislators of the State of Illinois are breaching a contract by forcing public employees to make a choice to diminish their originally-vested guarantee. They are breaking an enforceable promise, one that is bilateral and emphasizes an agreement between the State of Illinois and its public employees as to their future rights and benefits.
Regarding the diminishment of the COLA, pension reform offers public employees no ethical and lawful alternatives except to consent to the General Assembly’s demands by choosing between two illicit choices; second, this is unlawful because of the illegitimacy of the General Assembly’s advantageous attempt to renegotiate a constitutionally-guaranteed contract; third, it is unlawful to induce undue pressure upon public employees to make an unfair choice; fourth, this is an unjust financial enhancement for the General Assembly because it is a breach of contract for public employees to receive less than what the original vested right and benefit  guaranteed, and it is also a blatant exploitation of influence to obtain an unwarranted advantage (Illinois Pension Reform… Is Without Legal and Moral Justification).


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