Think of this post as the ultimate Coke-Pepsi challenge. How do you compute the blended COLA if you worked for a PERS employer and retired after October 1, 2013? Well, which do you like better? Coke or Pepsi? Most people drink these interchangeably, but there are die hards who have a very specific preference. You aren’t going to be happy with my answer. The correct answer is that you get some Coke, some Pepsi in varying proportions depending on when you started your PERS work history and when you retired. There is probably no single question that I’ve been asked more about the mechanics of PERS than this one, aside from the question of “should I retire”. I can’t answer the latter question because there are too many variables involved. The first question is relatively easy for me to answer, but it seems hard for those not mathematically gifted to understand. I’m going to give it the old college try here, below.
To understand the blended COLA that PERS applies, you first have to understand two really important concepts. First, since October 1, 2013 you’ve been working under a different set of rules for your post-retirement COLA. To grasp this, think of your career as being partitioned into two discrete blocks of time. The first period is the time you have worked for a PERS employer prior to October 1, 2013. The second period is the time you work for a PERS employer beyond October 1, 2013. We’ll call the first period, Period 1, and the second period, Period 2. Together Period 1 + Period 2 equal your entire career working for a PERS employer. Period 1 (the bulk of your career at this point) is subject to the old rules. The old rules say that you are eligible for a 2% maximum COLA depending on the annual CPI issued by the US Department of Labor’s Bureau of Labor Statistics in February of each year. For 2018 (to be applied for those eligible in 2019) the CPI is 3.35%. The rules say that you are eligible for a maximum of 2% on period 1 employment with any excess over 2% (3.35%-2% = 1.35%) going into a “bank” that can be used in years when the CPI is LESS THAN 2%. So for members who retire between August 1, 2018 and July 1, 2019, the Period 1 COLA will be 2% with 1.35% deposited into your COLA bank (this is also true for anyone who retired earlier than now). Period 1 is the CPI-tested portion of the COLA. For those working past October 1, 2013, the law was changed to limit the COLA to 1.25% on the first $60,000 of retirement income, and 0.15% on any excess earnings over $60,000 per year. This is the Period 2 portion of the COLA. What trips most people up is the fact that the Period 2 COLA is UNRELATED to the CPI. There is no test to determine if the CPI is less than or greater than the statutory amounts. You get those amounts whether there is inflation or deflation, and there is NO COLA BANK. There is no COLA bank because there is no CPI that is relevant to the Period 2 piece of the blended COLA. (There is another twist in the blended COLA calculation if you had service eligible for the Income Tax remedy. To make sure that the correct COLA is applied to the benefit, PERS backs out the income tax remedy from the Period 1 and Period 2 fractions of your benefit. After completing the calculations below based on the benefit less the tax remedy, the tax remedy percentage is multiplied sum of the pieces calculated below).
Now, to calculate your blended COLA for any given year, you need to know a bunch of different variables. First, you need to know the fraction of your entire career worked prior to October 1, 2013 (I suggest doing this in months to make the calculation easy). Second, you need to know how much (months) you worked after October 1, 2013. These numbers are fixed and invariant once you retire. Then, you need to know what the current year CPI is. PERS posts this in late February every year. If the number is greater than 2%, you’re golden because your Period 1 COLA will be 2% and something will go into your COLA bank. Third, you need to know what your current benefit is. This changes every year, so look at any check starting August 1 and before August 1 of the following year. Is your benefit for the year greater than or less than $60,000 (this is based on your current benefit - multiply by 12 if you are uncertain). If it is less than $60,000 then the calculation of your actual COLA percentage is fairly easy. Take the fraction of your career before October 1, 2013 and multiply that by your current monthly benefit. Then take that and multiply that by 1.02 (the 2% COLA). Then, take the fraction of your career spent after October 1, 2013 and multiply that by your current benefit. Finally, take that result and multiple it by 1.0125. Add the two sums together and you have your new benefit for the year beginning with the payment on August 1, 201x. To generalize this to benefits in excess of $60,000, there is a third piece to the calculations. Essentially the second step stops when you reach $60,000. You calculate it as described on the first $60,000. For the amount above $60,000 you use the same fraction of your career in Period 2 and multiply that fraction on the amount of your benefit above $60,000. You then multiply that result by 1.0015 to get the COLA on the fragment of benefit above $60,000. Add the three pieces together to get your final COLA for the given year.
People ask all the time what their “blended COLA” is. The problem is that the blended COLA depends on variables that can’t necessarily be known in advance. Those of us who retired prior to October 1, 2013 know the rules. We get a maximum of 2% COLA in any year regardless of the actual CPI, but subject to how much we have stored in our COLA banks in years where the CPI is less than 2%. If the CPI for a given year is 0.5%, new retirees will get 0.5% on the fraction of their career served prior to 10/1/13, while they receive 1.25% on the other fraction of their careers. For Period 2 in a person’s career, CPI is irrelevant; there is no bank, and if you earn more than $60,000, you’ll get 0.15% on the excess. The CPI calculation ONLY applies to people who retired before 10/1/13, OR to people who have careers that extend backwards before 10/1/2013. The old rules apply to old service (prior to October 1, 2013); the new rules apply to service after October 1, 2013. The “blend” is a combination of those factors.
In the Coke-Pepsi challenge, how much Coke you get and how much Pepsi you get in the mix depends on the distribution of your work time. For every individual this can be unique, which is why asking PERS for your particular blend is frequently a “fool’s errand”.
Hope this helps explain some of the arcane math of the “blended COLA”.
11 comments:
Hi--Any idea how this works for inactives? I am one of those still working for OUS, but who opted into the defined contribution plan in 1996. I will retire in about three years. Thanks for any help.
It should work as though you are simply under the old system. You will get your PERS benefit based on your PERS time, all completed well before 10/1/2013. The optional retirement plan doesn’t get a COLA because it is effectively a 401-K. Any increase in benefits comes asva result of your decision to increase your benefit to the extent you have the funds to donso.
Great blog Mark and thanks again for helping me get off of the fool's errand ;-). The one component that I did not mention was PERS backs out the tax remedy before they start the computation and then restore the remedy at the end. I would be more than glad to share with you back channel the email I received from PERS if it would be of any interest. Once again I sure do apricate your time and assistance you provide to the PERS Retiree's
@Steven Harley. I believe what PERS is saying is that the COLA for the Period 2 is based on the benefit less the tax remedy. I know that under the old rules, the COLA is applied to the entire benefit without regard to the tax remedy. I'd be interested in seeing any communication that disagrees with this conclusion. I know because my own COLA is easy to calculate because it is simply based on my gross benefit immediately prior to the COLA, and can be obtained by, for example, taking my current gross benefit and multiplying by 1.02. No fancy subtraction, no complex addition.
Good morning Mark, It appears they apply the tax remedy to the whole amount after the COLA has been applied. Here is my email Banjo1234@msn.com if you would like to drop a note I will send over the response I received from PERS.
Thank you Steve
Thanks Steve. I understand what they are doing. It isn’t fundamentally different than what happens under the old rules, but to have the numbers work out, they have to add this extra, somewhat complicated step. I will edit this step into the blog post when I get a chance.
I'm curious to read reviews of the PERS Medicare supplemental and advantage insurers. Do you know where I could find that?
I have spent too many hours looking looking for info and asking pers in hopes of understanding how the blended cola is computed from year to year. Your post is the most helpful information I have found, but I'm still confused about the details for a blended formula calculation for a Tier 2 that will have more years post 2013 than before. Would it be possible to share the formula in detail or, better yet, provide a multi year example calculation for a retiree with half their time pre 2013, a 1st year benefit if 60k, and, a 2%+ cpi?
Although I no longer support this site, I will try to give you some insight. Your COLA is meaningless until you retire. At retirement PERS will compute your Final Average Salary (FAS). Consult PERS for this calculation. Once that calculation is determined, you are in a position to determine your COLA, not before. Then, divide your career into two pieces -time before October 2013 and time after. Convert those pieces into percentages or fractions. It doesn’t matter. The pre-October 2013 fraction gets the actual COLA up to a maximum of 2%; the other half gets the COLA in two pieces - 1.25% on the fraction of salary attributable to post Oct 2013 up to $60,000 per year, plus 0.15% on the amount over $60,000. It sounds more complicated than it is, but once you know your FAS and how your career separates out into the two relevant fractions, the calculation is rather trivial. It should be simple after this.
Thanks for speedy response to an unsuppoerted blog. I am pretty up to speed on most of the variables that are known at least until legislative changes still to come and am just starting to get serious about retirement planning...the cola is a premature and minor detail in the scheme of things, but it has been bugging the heck out of me that the pers site, ors, oars etc. can be read in different ways on how the cola would be calculated above 60k down the road . When I have had occasion to ask pers, they can't clarify. My question relates to how the 2% is factored into the blend. I understand the 60k threshold for the period 2 calc is meant to apply to the entire undivided benefit amount. So if benefit stared at 100k, based on equal service time before and after 2013, in year 2 the benefit with cola would be 2% of 50k plus 1.5% of 10k plus 0.15% of 40k, for a new total benefit of 101,210k, right? But how would the cola for the next year be calculated? Does formula account for greater cola for the pre 2013 time or does it apply the 50.0/50.0 percent service time split to the total that year and each year thereafter irrespective of the associated proportion of cola from previous years?
No. The FAS is the only controlling factor. Your FAS is apportioned only to the portion of time spentvpre october 2013 and post. So to make this more concrete, suppose you retire with a FAS of 100,000 and exactly 50% time before and 50% after 10/13. Your first cola would be calculated as 0.5*(100,000)*(0.02) + 0.5 (60000)*0.0125 + 0.5 *(100000-60000)*(0.0015) = 1000+ 375+ 60
= $1435.00. Thus, at the start of year 2, your adjusted salary would be $101435. The next year, substitute 101435 in place of 100,000 in the equation.
The blended COLA does not distinguish where n your career the money is earned.
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