This Year the VRS “Diet COLA” Will Really Hurt

by Steve Haner

The most recent year-over-year inflation measure approached 9%, with many key food or energy items growing in cost even faster. The official inflation estimate just used to increase the state’s gasoline taxes as of July 1 was 7%. So what inflation factor will be used to adjust state and local employee pensions this summer? Those will go up less than 4%. 

The cost of living adjustment (COLA) for Virginia Retirement System retirees under the more generous Plan 1 (phased out for those hired after 2010) will be 3.85%, an extra $38.50 on every $1,000. Plan 2 retirees (of which there are few since most are the younger workers) will get an adjustment of only 3% in their pension payments starting in August.

In its most recent VRS newsletter (which arrived in our mailbox this week, since my wife is a VRS retiree) the point is made that these are the largest COLA amounts since 1991. But the newsletter also informs that no matter what the inflation rate is, the COLA has a nice tight annual cap: 5% for Plan 1 and 3% for Plan 2.

The caps were imposed more than ten years ago as the General Assembly revised VRS in several ways to reduce the demands it was making – and would make in the future – on the state’s treasury.  Through the low inflation of recent years the caps really didn’t create a major gap between the real rises in living costs and the rise in the monthly benefit.

Now it will.

This is just another example of how high inflation works in the real world, and how government manipulates its reaction to it (usually to protect the treasury).  The inclusion of annual COLA provisions has been a major advantage of government pensions, including Social Security, when compared to the private sector, where they are rare.  Virginia is one of the states with a Diet COLA, which will intentionally lag behind real living costs for retirees year after year.

The provision in the Code of Virginia which imposes these caps can be read in full here. The key passage is, shall we say, hard to decipher:

The percentages shall be based on monthly averages and shall be the difference between (i) the average for the calendar year just ended and (ii) the average for the most recent calendar year used in the determination of the post-retirement supplements currently being paid. The annual increase, if any, in the CPI-U shall be considered only to the extent of the first two percent plus one-half of the next two percent of any additional increase, or a maximum increase in the post-retirement supplement of three percent in any given year. However, for anyone who (a) is not a person who becomes a member on or after July 1, 2010, and (b) has at least 60 months of creditable service as of January 1, 2013, the applicable annual increase, if any, in the CPI-U shall be considered only to the extent of the first three percent plus one-half of the next four percent of any additional increase, or a maximum increase in the post-retirement supplement of five percent in any given year.

So, first the official government inflation measure (CPI-U) for two calendar years is averaged.  In this case that is calendar years 2021 and 2020.  Whatever that average is, Plan 1 recipients have the first three percentage points recognized and added in, plus one-half of the next four percentage points (up to a total of five percentage points.) Working backwards, the base inflation for that two-year period was apparently 4.7%.

Presumably, the higher inflation rate for calendar year 2022 will show up when next summer’s adjustment is made, but it will still be averaged with 2021 and capped at 5% maximum. Plan 2 will be capped at 3%. The Hybrid Plan is likewise capped at 3%.

Many other states have faced major financial crises from rising pension costs, and not just where union contracts were the drivers. The Virginia legislative effort, quarterbacked in part by former Republican Speaker William Howell, put VRS on a firmer footing for the future. Now that the retirees understand how it did that, things might get more interesting.

An aside: Any remaining doubt the Richmond Times-Dispatch is dead? This is a huge Richmond story, given how many VRS members and retirees live in the capital region, but so far it is missing from its pages. Maybe if we put up and then tore down a statue at the VRS headquarters?