The Massachusetts Retirees Association and the Special COLA (Cost of Living Adjustment) Commission deserve credit for focusing attention on a legitimate concern. Many long-retired public employees have seen the purchasing power of their pensions eroded by decades of inflation and rising healthcare costs. I support enhanced benefits for long-term retirees and periodic increases in COLA bases when circumstances warrant.
My disagreement is not with the objective. It is with the proposed funding mechanism.
The Commission’s proposal would dedicate a portion of excess pension investment earnings to a reserve fund that could later be used to finance COLA base increases. While that may appear prudent, it ultimately avoids the central policy question: Should excess investment gains be earmarked for future benefit enhancements, or should they be used to strengthen the long-term security of retirement systems?
Every dollar of excess investment return can only be spent once.
The proposal also creates an obvious asymmetry. During years of strong market performance, advocates seek to reserve gains for future COLA increases. Yet when markets decline, no one suggests reducing previously granted benefits. Once awarded, pension benefits become permanent obligations. Taxpayers and future contributors ultimately bear the risk if investment assumptions prove overly optimistic.
For that reason, COLA improvements should not be tied to temporary market gains. Instead, they should be evaluated periodically and funded transparently through the normal actuarial process. If a COLA base increase is warranted, the resulting liability should be measured actuarially and amortized over a reasonable period, just as public employers fund many other benefit improvements.
In fact, the Wellesley Retirement Board recently approved a phased increase in its COLA base from $20,000 to $25,000 through the normal actuarial funding process. The liability was measured, incorporated into the funding schedule, and funded without special reserve accounts or accounting mechanisms.
More importantly, retirement boards have a fiduciary obligation to protect the benefits retirees already possess. As retirement systems approach full funding, excess investment gains should first be considered for strengthening funded status, reducing investment risk, lowering contribution volatility, and enhancing long-term retirement security.
Where I believe the current debate falls short is that it treats pension funding and retiree healthcare funding as separate issues. Municipalities have one group of retirees and one pool of taxpayer resources. Pension and OPEB (Other Post-Employment Benefits) obligations should therefore be evaluated holistically.
This is where healthcare reform can play an important role. Reforms such as H.1399 have the potential to reduce retiree healthcare costs and OPEB liabilities while preserving existing subsidy levels and retiree protections. Unlike excess investment earnings, healthcare savings represent recurring reductions in future obligations. Those savings are real and sustainable.
Rather than relying on reserve funds tied to favorable market performance, municipalities could dedicate a portion of long-term healthcare savings toward periodic COLA base improvements. Such an approach would improve retiree purchasing power, strengthen pension and OPEB funding, and enhance long-term budget stability.
The debate should not be framed as a choice between helping retirees and protecting retirement systems. Well-managed systems can and should do both. Retirees deserve meaningful COLA improvements, but they also deserve the assurance that those improvements are funded responsibly and sustainably. A transparent actuarial funding policy, coupled with prudent management of pension and healthcare obligations, provides a better path forward.
David Kornwitz