A new study from the University of Massachusetts’s Gerontology Institute evaluated the gap that exists for retirees who live between poverty and having just enough income to cover their necessary expenses. 

Retirees in several states face an uphill battle when it comes to retirement security. In Oklahoma, for example, 19.6 percent of retired couples fall in this gap. In Wyoming, it’s 18.4 percent of retired couples, and in Kansas, it’s 16.4 percent. 

What’s one thing policymakers can do to reduce this gap? Pass cost-of-living adjustments (COLAs) so no retirees are no left behind. 

In Oklahoma, retirees are working with members of the legislature to introduce a COLA bill. Retirees in Oklahoma have not received a COLA in 12 years. In Wyoming, where retirees haven’t seen relief in 12 years, lawmakers are expected to introduce a much-needed inflation adjustment bill.  In Kansas, retirees are leading an effort to secure a COLA as well, which would be the first COLA granted there in 22 years. 

What is a COLA and how can it help ensure retirement security for retirees? 

As we’ve previously covered, a COLA is an occasional increase in the amount of a retiree’s or beneficiary’s pension payment in order to account for inflation

COLAs have been much discussed recently, in part because it has been so long since many retirees have received one. This post will explain what a COLA is, why it matters, and what states are doing to provide COLAs for retirees.

A defined benefit pension plan provides a set benefit amount at retirement according to a formula. That formula usually factors in years of service, final average salary, and a benefit multiplier. This determines the pension benefit that a retiree will receive throughout their retirement. For convenience’s sake, let’s say a retiree receives a $24,000 annual pension, or a monthly amount of $2,000. This benefit is guaranteed for the rest of the retiree’s life. However, without a COLA, the value of that pension benefit will erode over time. Why? Because of inflation.

The price of almost everything is constantly going up. According to the U.S. Bureau of Labor Statistics, the average inflation rate in the United States has hovered around 2 percent for the past decade. This means that if you bought something for $100 this year, the same item would cost $102 the next year. However, inflation does not increase at the same rate for all expenses. For example, the rate of inflation for health care is consistently higher than the general inflation rate (about 70 percent higher).

Returning to the example of our retiree with a $2,000 monthly pension, that retiree’s pension will stay the same year after year, even as the cost of monthly expenses goes up each year. Over time, this retiree will be able to buy less and less with their monthly pension because the cost of food, health care, and other items will have increased since their retirement. This is why many pension plans offer COLAs, to reduce the deteriorating effects of inflation on pension benefits. Social Security makes annual cost of living adjustments. In 2018, Social Security recipients will receive a 2 percent COLA. As we’ve discussed before, about a quarter of state and local public employees do not participate in Social Security.

COLAs are managed differently by different pension plans. Some plans include automatic COLAs; others require that plans meet certain funding requirements before a COLA can be awarded. Following the Great Recession, public pension plans in many states ended or suspended COLAs. However, now that pension plans are recovering from the financial crisis and funding levels are improving, several states are currently considering proposals to either offer one-time COLAs or restore regular COLAs.

Teachers, firefighters, nurses, sanitation workers, and other public employees earn modest, but dignified retirements after years of service to their communities. Without at least an occasional COLA, those retirements become less secure over time as the value of their pension benefits erode. 

To learn more about how you can get involved in each of these states, be sure to sign up for email updates from Oklahoma, Wyoming, and Kansas, along with making sure you like Oklahoma, Wyoming, and Kansas’s state coalition pages on Facebook.