Key points from this story:
- PERA prepares a SB 10-001 report every five years
- The report must show two things: how the annual increase compares to inflation and what progress has been made toward eliminating the unfunded liability
- The 2020 report shows that inflation has risen an average of 1.5% per year since 2010 while the annual increase has risen an average of 1.4%
Although the annual increase retirees receive has decreased in recent years, it is generally keeping pace with inflation over the long term — one of the key findings in a report PERA delivered to the General Assembly this month.
Background of the Report
In 2010, the General Assembly passed Senate Bill 10-001, which made structural changes to PERA. In addition to these changes, the bill required PERA to prepare and submit a report to lawmakers every five years.
The report is required to show two things: the progress made toward eliminating unfunded liabilities and an analysis of how the annual increase retirees receive compares to inflation.
PERA prepared the first such report for the General Assembly in 2015. On January 1, 2021, PERA submitted a report that updates the original report with data from 2015-2020.
The Annual Increase and Inflation
The annual increase in 2020 was 1.25%. In 2021, the annual increase will also be 1.25%. This amount has changed many times throughout PERA’s history. The formula used to determine the annual increase amount changed most recently with the passage of SB 10-001 and again with SB 18-200.
The annual increase helps retirees keep pace with inflation throughout retirement. That does not mean that the annual increase will equal inflation in any given year, however. In 2017, for example, the annual increase was higher than inflation (2.0% vs 1.0%) while, in 2019, inflation was higher (2.5% vs 0.0%).
As part of this report, PERA is required to compare how the annual increase, over time, compares to inflation. The 2020 report showed that inflation rose an average of 1.5% per year since 2010 while the PERA annual increase rose 1.4% per year since 2010. Between 2010 and 2019, inflation rose a total of 16.2% while the annual increase rose 14.9%.
It’s also important to note that inflation is measured using a specific measure, called the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) (learn more about the CPI-W here).
The CPI-W accurately captures broad changes to the cost of food, energy, housing, and more. This is useful as PERA has retirees that live throughout the United States.
However individuals don’t experience inflation at a national level — you experience the inflation of the area in which you live. For example, in any given year a person living in Grand Junction might experience inflation at a rate higher than the national average while someone living in Alamosa might experience a lower rate of inflation. Or vice versa. Additionally, the cost of health care has been rising faster than inflation for years.
Managing these changes can be difficult. However, a secure lifetime benefit with an annual increase that compounds annually remains a valuable tool to have in retirement over the long term.
Progress Toward Eliminating PERA’s Unfunded Liability
The report also included an update on PERA’s progress toward the goal of eliminating all unfunded liabilities (this information is also provided publicly every year in PERA’s Comprehensive Annual Financial Reports).
The report states that the changes in SB 10-001 led to an immediate reduction in $8.9 billion of liabilities and the SB 18-200 changes reduced liabilities by another $3.9 billion.
PERA’s liabilities aren’t a static figure, however, and are updated every year. For example, strong investment returns in 2019 led to PERA making faster-than-expected progress.
Demographic changes are another factor that can affect PERA’s liabilities. PERA undergoes an experience study every four years to ensure that the projections it uses for inflation, retiree lifespans, the ages at which members retire, and more are as accurate as possible (the experience study is covered in-depth here).
The most recent experience study showed that, among other things, the trend of retirees living longer than originally projected continues. This trend adds liabilities to PERA, as longer lifespans mean a larger lifetime benefit will be owed to retirees on average.
A likely result of these adjustments is that the automatic adjustment provision (AAP) will go into effect after the release of the next CAFR, in June 2021 (the final determination regarding the AAP is part of the CAFR process and is released with the release of the CAFR). If this happens, the changes would go into effect in July 2022.
While changes like these can be difficult, they have resulted in a more secure and resilient plan members can rely on in the future.