Thinking About Passing a COLA? Here’s What You Need to Know

Cost-of-living adjustments (COLAs) can restore some or all of the purchasing power your retirees have lost during their retirement. Here is everything you need to know if you’re thinking about passing one.

We all know the saying, “A dollar doesn’t buy what it used to.”

As a TCDRS employer, this is something to consider when structuring your retirement plan, as your retirees’ benefits are not automatically adjusted for inflation.

A cost-of-living adjustment, or COLA, is a plan option available to participating employers each plan cycle. COLAs help reduce the impact of inflation by restoring some or all of the purchasing power your retirees have lost during their retirement. However, COLAs do have a rate-increasing effect on your plan into the future, so it’s important to factor that into your funding decisions.

What are My COLA Options?

There are two types of COLAs available with TCDRS: Flat-rate and CPI-based.

Flat-rate COLAs
Flat-rate COLAs increase your retirees’ benefit payments by a percentage of your choosing, up to an annual limit, which is 3% for 2025 COLAs. All retirees get the same percentage increase. However, a flat-rate COLA will not restore each individual retiree’s purchasing power the same. For example, a recent retiree may have lost only a small percentage of purchasing power, while someone who’s been retired much longer may have lost significantly more purchasing power. A flat-rate COLA might take care of the new retiree’s loss of purchasing power, but wouldn’t begin to address the older retiree’s losses.

CPI-based COLAs
CPI-based COLAs use the Consumer Price Index to restore the lost purchasing power for each retiree based on their original benefit amount and how much inflation has occurred since they started receiving their benefit. A CPI-based COLA allows employers to choose how much lost purchasing power to restore — anywhere from 10% to 100%. A 100% CPI will fully restore the purchasing power lost through the years but may come at a high cost. A lower CPI percentage might be more affordable for some employers, especially if they have never passed a COLA.

Both COLA types permanently increase your retirees’ benefit payments. All COLAs become effective Jan. 1 and only impact retirees who have been retired for at least one calendar year. For example, if you retired Dec. 31, 2021, you would be eligible for a COLA on Jan. 1, 2023.

How Would Passing a COLA Impact My Plan?

In general, COLAs are funded over 15 years. However, employers can adopt elected rates or make additional contributions to pay for all or part of the cost of a COLA upfront.

It’s important to note that frequent adoption of COLAs can result in a “repeating COLA designation” by the Governmental Account Standards Board (GASB) and impact your organization’s financials. TCDRS will let you know if you would receive the designation by adopting a COLA and what the impact on your financials will be. Generally, you can adopt a COLA once every three years without receiving the repeating COLA designation.

The Plan Customizer can help you see the cost of adopting a COLA as a percentage of payroll. We can also perform special studies upon request to show the impact of specific COLAs on your benefit recipients’ monthly payments and provide strategic guidance on funding options. For instance, TCDRS can provide an estimated dollar cost for employers interested in paying for a COLA up front.

If you are interested in passing a COLA, be sure to request a special study well in advance, as they can take up to two weeks to complete.

For more information about COLAs and special studies, please contact your TCDRS Employer Services Representative or call Employer Services at 800-651-3848.

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