In contrast, pension payments under UCRP are adjusted using a complicated formula and a somewhat different measure of inflation. UCRP's adjustment is based on the Los Angeles and San Francisco components (averaged together) of CPI-U (where U stands for All Urban Consumers, a broader category than Urban Wage and Clerical Workers). However, the main difference between UCRP and Social Security when it comes to the inflation adjustment is that while Social Security provides 100% protection, UCRP uses a formula that provides only partial protection. Thus, although the twelve-month CPI increase (February 2021 - February 2022, the period used to calculate the adjustment) was 6.25%, most pensioners received 3.69% adjustments.
The basic formula for UCRP is that it compensates 100% for inflation up to a CPI increase of 2%. Above that level, there is no compensation for inflation in the 2-4% range. Then it compensates for the portion of inflation above 4% for 75% of inflation but capped at a 6% adjustment. A 12% annual rate of CPI inflation would produce a 6% pension increase. (2% for the first 2%, 0% for the next 2%, and 75% of the next 8% but with the total adjustment capped at 6%). There are additional elements of the formula that "recognize" the shortfall in protection but these cut in when CPI inflation is below 2% and, in effect, provide what amount to retroactive adjustments.
There is much to be said about the measurement of inflation, i.e., the degree to which the CPI reflects inflation accurately. And there is much to be said about the ability of economists to forecast what the rate of inflation will be, however it is measured. Suffice it to say that many economists were surprised that inflation remained as low as it did during the recovery from the so-called Great Recession of 2008. When inflation kicked up more recently, there was considerable debate among economists as to whether it was a transitory response to the fading of the pandemic and pandemic dislocations or whether it was a phenomenon that would continue for an extended period. At the most recent meetings of the Regents, it appeared that the Chief Investment Officer (who manages the pension fund) has shifted from the transitory camp to the extended-period view.
The bottom line, however, is that when CPI inflation is higher than 2% - and so the adjustment for inflation in UCRP pension payments is only partial - there will be a loss of purchasing power of UCRP recipients. The higher the CPI inflation rate, the larger the loss. Even if you believe that current inflation is at or near its peak and that it will soon start to decline, any such belief has to be qualified as a probability, not a certainty. It appears that the risk of an inflation-caused erosion of pension buying power is higher now than it has been for many years.
Although the inflation adjustment formula is part of the basic pension and in principle a legal obligation of the Regents, the Regents also had a practice, one that developed during years of higher inflation, of periodically surveying those receiving pensions to see if any had fallen below 75% of their initial purchasing power. The Regents would then provide an ad hoc adjustment (increase) for such recipients to restore (partially) their purchasing power. This practice was deliberately not done at regular intervals to avoid it arguably becoming a part of the official and legally-binding pension promise. It was, however, done from time to time.
It might be noted that there are now members of the Board of Regents who have recent appointments and may not be aware of this past practice. Thus, it would now be a good time to educate the Regents about the past practice of periodically adjusting the pension benefits of those who have fallen below 75% of initial purchasing power.
No comments:
Post a Comment