As state lawmakers seek a pension reform solution, the cost-of-living adjustment is an important moving part. In the current system, retirees get an increase of 3 percent per year. Some like the certainty of that, and it makes them richer when inflation is less than 3 percent, but it doesn’t protect them against high inflation, should that occur, says University of Illinois finance professor Jeff Brown.
“The sense in which it imposes risk on them is it is only giving them certainty in terms of what we call nominal dollars, but it’s giving them no certainty in terms of what those nominal dollars can buy,” he said.
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Brown testified before the conference committee that is attempting to make a breakthrough on public pension reform, and the 3 percent annual cost-of-living adjustment is a driver of cost when inflation is less than 3 percent, which is has been for many years.
Brown urges lawmakers to adopt a plan that ties the cost-of-living adjustment to the rate of inflation, even if it’s only half the rate of inflation, because it’ll protect retirees from high inflation and maintain their buying power if they live to an advanced age. The cost to the state should be insignificant, Brown testified, because if the issue is inflation, state tax revenue also will go up as income and sales rise with inflation.
The conference committee will meet for the third time today (Monday) in Springfield, one day before the governor’s deadline for a report, a deadline that committee members say they are certain to miss.