How does a pension stand up to inflation?

What good is a 3% COLA when inflation is running at 10% or higher?

By Gretchen Morgenson

Like many Americans, Jan Stewart is facing a new problem this fall: how to live on an income that stays the same while her cost of living skyrockets.

A retired elementary school teacher in Toledo, Ohio, Stewart receives a monthly check from the pension she paid into for 31 years. But the size of her checks, and those of 157,000 former Ohio teachers like her, does not rise even when basic costs of living do. Public pension recipients across the nation are in the same boat.
 

Jan Stewart, 67, a retired teacher, at her home in Toledo, Ohio.Ali Lapetina for NBC News


Recently, the Bureau of Labor Statistics made official what many shoppers had been seeing for months — prices of everyday goods like food, energy and housing are rising much faster than they had been. The measure, known as the consumer price index, spiked at an annual rate of 6.2 percent in October, up from 0.1 percent in May 2020 and its highest level in more than three decades.

For years, the rate of inflation in the U.S. had been low, benefitting American consumers by keeping the buying power of their dollars relatively stable and strong. That has changed.

"I rely solely on my pension,” Stewart told NBC News, which amounts to roughly $3,800 a month. “I keep a budget of everything that I spend. Now everything’s gone up and through no fault of my own, I’m in this position today.”

Higher inflation hurts everyone, but those who live on fixed incomes — pensioners and retirees — are especially harmed. Some pensioners get a “raise” in their monthly checks during inflationary times if their pension has what’s known as a cost-of-living adjustment or COLA. Social Security recipients are among the beneficiaries that receive such increases and in October, the Social Security Administration said it would increase payments by 5.9 percent in January to reflect the recent jump in consumer prices.

But millions of public pension beneficiaries — including one quarter of employees of state and local government — don’t participate in Social Security, said Alex Brown, research manager at the National Association of State Retirement Administrators, a nonprofit group. “This is a figure that includes approximately 40 percent of public-school teachers and over two-thirds of firefighters, police officers and other first responders," Brown said.Stewart receives a monthly check from the pension she paid into for 31 years.Ali Lapetina for NBC News

Public pensions in at least 31 states have reduced cost-of-living increases or eliminated them altogether in recent years as their payout obligations swelled beyond the dollars they had on hand to cover them. Firefighters, teachers, police and other workers in four other states that have cut the increases entirely — Iowa, New Jersey, Washington and Wyoming — are now behind the eight ball.

“When we talk about retirees from public pension plans, inflation is affecting the purchasing power of the retirement benefit they’re receiving,” Brown said. “And without the presence of any adjustment for inflation, this depreciation in purchasing power can affect the adequacy of that retirement benefit.”

Stewart, 67, is experiencing this first-hand. The kindergarten teacher retired in 2007 and now relies on a monthly check from the State Teachers Retirement System of Ohio, which has $95 billion in assets. At the time she retired, she received a 3 percent COLA. But in 2016 it was reduced to 2 percent, then eliminated beginning in 2017. Ohio is one of seven states in which most public pension recipients cannot participate in Social Security.

These changes have cost her $650 a month, Stewart said. “That’s money I was counting on.”

Stewart is no spendthrift. A single mom, she funded her son’s undergraduate education and adheres to a strict budget she draws up each year. Because she has no COLA and inflation is rising, she said she may have to move out of her home of 20 years and curtail visits to her son and daughter-in-law who live a few states west. She is also worried about rising healthcare costs.Higher inflation hurts everyone, but those who live on fixed incomes — like pensioners and retirees — are especially harmed.Ali Lapetina for NBC News

Nick Treneff is the spokesman for the Ohio pension. He said its officials understand the tough position retirees are in given the spike in inflation, and are weighing whether they can reinstate a cost-of-living adjustment. First, they must receive an analysis, expected in March, from the pension’s actuary, which is examining data on plan participants to try to predict how much money will be needed for future benefits.

“The pension board and staff have a commitment to serving the members,” Treneff said, “but they have to look out for the long-term sustainability of the fund.” Granting one 2 percent cost-of-living increase next year, for example, would cost the fund $1 billion over the next 18 years, he said.

The STRS board said it eliminated the COLA in 2017 because the pension was “underfunded,” meaning its investments were not generating enough to pay out future obligations.

Most public pensions are underfunded, Brown said, for several reasons. Low interest rates have reduced earnings, for example, and some pensions have made poor investment choices or paid sky-high fees to advisers, neither of which their participants had any control over.

Like many public pensions, STRS reported a big investment return in its most recent fiscal year, which ended in June. The fund was up 29.2 percent in the period.

Stewart and other retirees relying on the Ohio teachers’ pension say they’re happy about the returns but angered that the pension's internal investment managers recently received almost $7 million in bonuses, money that could have gone to retirees.

Money managers typically receive bonuses if their performances meet or beat certain benchmarks, Treneff said, and 70 percent of the pension is overseen internally, lowering its costs by about $100 million per year.

Some of the retired teachers have also criticized the pension’s oversight and several weeks ago, the state auditor announced it was pursuing a so-called special audit of the pension.

Announcing the special audit in a letter to the teachers’ pension board, Keith Faber, the Ohio auditor of state, wrote, “It is the policy of the Auditor of State’s Office that allegations of public corruption, requests for special audits or requests for additional audit procedures are referred to the Auditor of State’s Special Audit Task Force. The information obtained to date supports a reasonable basis for conducting a special audit.”

The pension board is cooperating and providing the documents request by the auditor, Treneff said. He added that the complaints mentioned by the auditor arose from a study commissioned by a group of Ohio retirees and published earlier this year that concluded the fund’s investments were costly and opaque, findings the pension disputes.

More than 500,000 beneficiaries rely on the STRS pension fund, 157,000 of them retirees. Ohio teachers contribute 14 percent of their salaries to the fund each year, an amount matched by their employers. Last year, the average retiree received $44,000 in annual pension payments, according to the fund's annual report.

Teachers in Ohio are not the only ones feeling inflation’s pain. In recent years, 31 states, including Montana, Florida and Virginia, changed their practices on cost-of-living adjustments, reducing benefits in some cases significantly. Current retirees were hurt the most by these changes, Brown said.


And in 2019, a University of Massachusetts study found that half of the older adults living alone in the U.S., and 23 percent of older adults living in two-elder households, lack the financial resources required to pay for basic needs. To the degree these folks live on fixed incomes, inflation increases will ravage them as well.

History shows that once inflation takes hold, it’s not easy to tame, in part because of a psychological element: Consumers often respond to rising prices by making future purchases now to get ahead of higher costs later. This can propel prices as well.

Curbing inflation usually means raising interest rates, a duty of the Federal Reserve Board, the nation’s central bank. Rate hikes can slow economic growth by increasing borrowing costs, so central bankers are hesitant to make such shifts. Indeed, after an early November meeting of the Fed, Jay Powell, its chairman, said the board had no intention of raising rates soon.

None of that helps Americans like Stewart, who are essentially taking a pay cut thanks to higher costs.

“I just need to have what I was promised,” Stewart said. “And mostly, I need to have trust in my pension system."