COLA for CalSTRS is a Reminder for UCRP and the Regents

CalSTRS, the state pension plan for school teachers, has a system in place to deal with the impact of high inflation on pensioners. It normally provides a 2% COLA (cost of living adjustment) which "works" OK when inflation is in that range to maintain purchasing power. But it also has a system in place to deal with the impact of higher inflation, basically by limiting the erosion of purchasing power so that pensions don't fall below 80-85% of their real starting value.

There is relevance in the CalSTRS approach for the UC pension plan which I will explain below. But first, note the item below from the Sacramento Bee:

THE STATE WORKER 

Retired California teachers could receive checks to help cover inflation costs 

Wes Venteicher, 6-1-22

About 55,000 retired teachers would receive new payments to supplement their pensions under a proposal moving through the California State Legislature. Aimed at offsetting inflation, Senate Bill 868 would provide quarterly payments to teachers who retired before 1999. The proposal would deliver increases of 5% to 15% of their pensions depending on retirement year, with those who retired before 1980 eligible for the biggest bumps, according to a summary prepared by the California State Teachers’ Retirement System. The CalSTRS board supported the proposal early this year. The legislation cleared the state Senate last week. It requires approval from the Assembly and Gov. Gavin Newsom to become law. 

The new benefit would cost about $592 million, according to CalSTRS. The money would come from an account established in 1989 to help retired teachers cope with inflation. The account, which is separate from the system’s $318 billion investment fund, is supported by the state’s general fund, revenue from leased school lands and payments related to federal land grants to California schools. The proposal, introduced by Sen. Dave Cortese, D-San Jose, would provide additional payments on top of two other inflation-based CalSTRS benefits. 

The retirement system provides a 2% increase to all retirees and beneficiaries each year. The increase is not compounded. Rather, the system increases retirees’ payments each year by an increment equal to 2% of what they received upon retirement. Additionally, the system tracks how retirees’ pensions are affected by inflation. When inflation shrinks the “purchasing power” of a pension below a certain floor — 80% to 85%, as set by the CalSTRS board — a retiree or beneficiary becomes eligible for supplementary payments. Those supplements restore purchasing power to between 80% and 85% of what it was originally.

Cortese’s bill would provide additional payments from the same account to teachers who retired before 1999, bringing their purchasing power closer to 100%. Retirees would receive quarterly checks starting July 1, 2023 that would increase their benefits by average amounts ranging from about $1,860 per year to about $3,768 annually, according to CalSTRS. 

The account that would fund the payments is called the Supplemental Benefit Maintenance Account. It’s meant to supply supplemental benefits through 2089, and has about $11.9 billion more than estimates say it will need, according to CalSTRS. Cortese’s proposal would reduce the surplus to about $11.3 billion. 

The surplus is due to lower-than-expected inflation in recent years, CalSTRS spokeswoman Rebecca Forée said in an email. Supplemental benefits are not guaranteed for retirees. If inflation surges well above the assumed annual rate of 2.75% for many years, the fund could run out of money early, according to CalSTRS. Inflation, as measured in federal indexes, rose 4.4% in the fiscal year ending June 30, 2021, according to CalSTRS, and is on pace to exceed 4% for the year ending later this month.

Source: https://www.sacbee.com/news/politics-government/the-state-worker/article262049272.html. 

In contrast to CalSTRS, the UC pension plan does not have a formal guarantee of maintaining 80-85% of starting purchasing power. Its formal COLA arrangement is more protective against inflation than CalSTRS' system, but it only partially compensates for inflation above 2%. The partial protection means that some long-time pensioners eventually have their starting purchasing power fall below 80-85%. In the past, when there was high inflation, the Regents had a periodic "practice" (not a formal obligation) of protecting pensioners from falling below 80-85% by making periodic ad hoc adjustments in the pensions of those below that level. In effect, the Regents would voluntarily do what CalSTRS automatically does.

Inflation has picked up in the past year. The latest UCLA Anderson forecast (which we will discuss in a separate post) indicates that the Consumer Price Index won't get back to a 2%-ish level until 2024. Thus, in response, past practice of the Regents would be to restore those pensioners who have fallen below 80-85% of purchasing power - there won't be many at this point - to that level. However, no such discussion at the Regents has taken place. 

There are now new Regents who were appointed in the era of low inflation who probably know nothing of the past practice. The fact that there is discussion in the legislature with regard to having CalSTRS go BEYOND the 80-85% guarantee and go all the way to 100% - as the article above shows - would be a good starting point for a discussion of the 80-85% practice for UCRP.