Some Thoughts on COLAs

by Barry McLaughlin, who serves on the systemwide FWC and on the Faculty Association board at UCSC

Most faculty do not think about their retirement plan until late in their careers. They have heard that the University offers a good plan, but they do not know much about the details. They know that there is a cost-of-living adjustment (COLA) built into the plan, but few faculty know how it is determined. In particular, few realize that the value of their benefit shrinks considerably as they get older. Presently, the UCRS Board makes certain adjustments to assure that the benefits of a given cadre (based on year of retirement) do not fall below 75% of the consumer price index (CPI) for the Los Angeles and San Francisco metropolitan areas. However, there is no guarantee that the COLA will stay above 75%.

The current formula for determining the COLA for retired faculty is a complicated one. The Regents allow 100% up to 2% COL increase; nothing additional between 2% and 4%; and 75% of everything from 4% to 9%. If the COL is between 2% and 4% in a given year, the faculty receive only a 2% increase. This is what happened this past year. The COLA allowed by Social Security, which is pegged to the Consumer Price Index (CPI), was 2.4%. However, the Regents’ formula only allowed for a 2% increase.

Over the years, this leads to a considerable loss in real income for retirees. For example, look at a hypothetical situation of a faculty member retiring in 1984 with a benefit of $50,000. In 15 years that amount would have grown to $68,302 with the COLAs allowed by UC. If COLAs were the same as those given by Social Security over this period, the amount would have grown to $78,665. If the COLAs were tied to the Consumer Price Index in California over that period, the amount would have grown to $82,394.

For some years now, the Regents’ cost of living assumption has been 4%. This means that that retirees’ future compensation is estimated with a 2% increase each year (the remaining 2% falling in the 2-4% gap). The difference between 2% and 4% is considerable over a period of time. Consider a UC faculty member retiring today with a $100,000 retirement income. In 15 years this amount would have grown to $134,587 with a 2% increase annually; with a 4% annual increase the amount would have reached $180,094.

Presently the retirement fund is at an all-time high—over $32 billion. This is a staggering amount of money. In 1991 when the University was concerned about the surplus in the fund and began the VERIP programs, the amount of the fund was about $12 billion. The fund has almost double that amount now—after the VERIPs. No one has paid into the retirement fund since 1992. Indeed, active faculty will have two sources of retirement income—their benefits from the retirement fund and their required 401(a) contributions.With the enormous surplus now in the UC retirement program, it seems appropriate to discuss ways to assure that the real value of faculty retirement benefits does not suffer severe erosion. Two actions seem especially worth considering: (1) eliminating the 2%-4% gap, and (2) providing retired faculty with a guarantee that their income will not fall to less than 85% of the cost of living in California.

Active and retired faculty should be concerned about the Regent’s conservatism regarding the retirement fund in the light of future economic realities. It is true that the University of California has a very good retirement program. The benefits exceed those of many other programs. Most retired faculty are happy with the program. However, current and future retirees can expect to live longer than their predecessors—with increasing health care costs. As matters stand presently, they can expect to see a severe decline in the real value of their income relative to the cost of living in California.