COLA

At a gathering the other night, some friends and I were talking about what benefits should be given up for the greater good of the corporate and public interests in a public workers' self-sacrifice of what was originally owed to all of us.  What followed was an argument which ranged from one extreme to the next.  Voices varied from "sell the Governor's mansion" to the belief that "the loss of a compounded COLA" might be acceptable.  Acceptable?  Had it been acceptable for those who did receive Social Security - as teachers do NOT - imagine what life would have been like ( or hadn't been like) for Ida - see below.  My good retired friend south of I-80 who receives $24,000 per year to survive will eventually be left in the wake of increasing costs to survive in very short order without her compounded COLA.  As the COLA will be first and foremost this January, I recall an earlier vocabulary for all of us.    

COLA (Cost of Living Adjustment)

noun.  Annual increases to retirement benefits  “to offset the corrosive effects of inflation on fixed incomes ” are known as Cost of Living Allowances or Adjustments (www.ssa.gov.history).   In Illinois, TRS and other public pension plans were accompanied by a compounded COLA prior to the development of a new Tier Two public employee (HB1946) in January of 2010.  Tier Two recipients will be provided only “simple” COLA’s.  Any allowances or changes to pension benefits in Social Security or public pensions to ward off inflationary destruction were not always the norm, however.  See history below:

The first Social Security benefit in the United States was issued to Ida May Fuller of Ludlow, Vermont, in January of 1940 (pictured at right).  At age 65, Ida May began collecting $22.54 monthly, and she lived until 1975, surpassing her 100th birthday.  For the first decade of payments, Ms. Fuller’s benefits remained unchanged; that is, she received only $22.54 per month.  Unfortunately, Ms. Fuller’s steady payment was accompanied by an average annual inflationary increase of 5.52% during the next decade (http://inflationdata.com/inflation/Inflation/DecadeInflation.asp).     In fact, by 1950, retired workers applying for and receiving Social Security were receiving less than if they’d have been supplied the least effective social safety net of Old-Age Assistance – also a part of the original Social Security Act of 1935.   This shortcoming prompted the enactment of major amendments that increased benefits for the first time in 1950 and again in 1952 for retired beneficiaries. After the passage of the Amendments to the Act, Ms. Fuller’s payments climbed to $41.30 per month.  

Special acts of Congress provided later increases on an occasional basis until July of 1972, when President Richard Nixon signed PL 92-336, which authorized a 20% cost-of-living effective in September of that year.  The statute also established procedures for the inception of an annual automatic cost-of-living adjustment.  Cost-of-living increases are based upon increases in the cost of living as measured by the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W), determined by the Bureau of Labor Statistics (BLS).  According to IEA Fact Sheet (HB5418 McCarthy (D) Governors Pension Proposal for Educators), “…Social Security has a compounding COLA.”   Members of Tier One in Illinois are currently promised a compounded COLA.  

Next:  Simple vs. Compounded Cost-of-Living Adjustments