Putting COLA on a diet

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A recent Chicago Tribune article declaring that "pension reform could hit oldest retired teachers the hardest" and featuring a profile of charming 105 year old Daisy Rittgers certainly grabbed the attention of this vocal advocate of overhauling teacher retirement systems. 

The reform in question is a proposal to end Illinois' practice of an automatic annual 3 percent cost of living adjustment (COLA). With compounded interest, this is quite a costly benefit, and, as we noted in our recent No One Benefits analysis of teacher retirement systems, COLA cost Illinois $900 million in 2011. Costly indeed for a system that's $43 billion in the hole.

COLA increases are certainly necessary. Without them, Ms. Rittgers would still be receiving the same annual pension of $6,327 as when she retired in 1972. But automatic COLA adjustments--particularly in years when inflation and cost of living aren't rising--just add to system costs. Twenty states have the more sensible policy of linking COLA to the Consumer Price Index. Another seven states tie COLA to the financial health of the overall system.

But try explaining to Ms. Rittgers that this is a necessary correction to an overly generous past policy. That unpleasant notion is one of the many reasons policymakers are so reluctant to take on pension reform.