Summary
First, PERA is better funded than in 2020. Investments outperformed expectations which led to a better funding status. We do not have information about how market volatility in 2022 will affect investments, so the good news may be short-lived.[1]
High inflation is good for the funding status of PERA and bad for retirees.
How inflation hurts retirees
The cost-of-living adjustment is not keeping up with inflation.[2] The cost-of-living-adjustment is the raise that retirees receive to deal with typical baseline inflation. For 2021, it is capped at 1.25%, and for 2022, it will be capped at 1%. Over the last 12 months, inflation was 9.1% (Source: US Bureau of Labor Statistics).
The result is that retirees lost 7.2% of their buying power.[3] Even though they are spending 1% more dollars, they can buy 7.2% less food, electricity, family vacations, and property.
How inflation helps PERA
High inflation, so long as it translates to employee wages, will increase the contributions to the PERA fund. Wages and, therefore, employee contributions are both rising. Therefore, PERA has more incoming investments that can help build stability in the pension plan.
According to the most recent report, PERA modeled wage inflation at 3%, which matches the provision for state employees’ salary increases in the state budget.
[1] Analysts based return assumptions on the last three years of returns. Per the PERA statements, unexpectedly good performance in the calendar year 2020 was a driving factor in exceeding expectations. See full disclosure in the Public Employees’ Retirement Association of Colorado Annual Comprehensive Financial Report. Information on funding status starts on page 7.
[2] PERA refers to the cost of living adjustment as the annual increase (AI). The figures used in this article affect most retirees and current employees. Some plans with PERA, such as DPS pension and employees who started receiving benefits before 2007, have special provisions and are excluded from this article.
[3] The calculation for loss in buying power isn’t simple subtraction. It’s defined as 1 – (new wage/new dollar value) or 1-(1.0125/1.091).