How the Consumer Price Index impacts your COLA
By Julie Wyne, Assistant Chief Executive Officer, External and Legal Operations

Because consumer prices were down over the past year, the Cost of Living Adjustment (COLA) granted by OCERS in 2010 will land in negative territory. Sometime in late January 2010, the U.S. Bureau of Labor is expected to provide the official Consumer Price Index (CPI) for 2009.

OCERS' Board of Retirement sets the COLA annually, to be effective April 1, 2010, based on the CPI provided by the Bureau of Labor. The CPI is a measure of the average change over time in the prices paid by urban consumers for consumer goods and services such as food, housing, apparel, transportation, medical care and education. The COLA is limited to a maximum annual increase or decrease of 3 percent. If the CPI exceeds 3 percent, any overage amount is added to an OCERS member's "COLA bank."

Because the annual cost of living change is negative, OCERS will draw from the "COLA bank" first and then decrease the retirement or survivor allowance by any amount left over (but not below the original benefit amount granted at retirement). Typically, the more years an OCERS member has been retired, the more they have in their "COLA bank." Click here to view a chart to show how recent CPI increases have impacted the "COLA bank" for OCERS payees based on their original retirement date.

Let's look at a simple example of the COLA at work:

Mary retired on April 15, 2005. As of Dec. 1, 2009, Mary received $1,000 a month in retirement benefits and had a COLA bank of 4%. Let's see what happens now that the CPI for 2009 is -1% (negative one percent). Effective April 1, 2010 OCERS will:
 

• Subtract the -1% for 2009 from Mary's COLA bank, leaving a balance of 3%.
   

• Then grant a 3% COLA to Mary (the maximum allowed each year) drawing from her remaining COLA bank balance.
   

• Then increase Mary's monthly retirement benefit payment to $1,030 (her $1,000 benefit + 3% COLA), and her COLA bank balance will be 0%.