The Prevalence of COLA Adjustments in Public Sector Retirement - - PowerPoint PPT Presentation

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The Prevalence of COLA Adjustments in Public Sector Retirement - - PowerPoint PPT Presentation

Nov 16, 2023 168 likes •391 views

The Prevalence of COLA Adjustments in Public Sector Retirement Plans SIEPR Working Longer Conference October 2020 Maria D. Fitzpatrick, Cornell University & NBER Gopi Shah Goda, Stanford University & NBER Motivation Approx. 14% of

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The Prevalence of COLA Adjustments in Public Sector Retirement Plans

SIEPR Working Longer Conference October 2020 Maria D. Fitzpatrick, Cornell University & NBER Gopi Shah Goda, Stanford University & NBER

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Motivation

  • Approx. 14% of the labor force consists of state and local employees

who are eligible for retirement benefits from a state- or locally- administered retirement plan

  • Many of these plans have long faced a funding gap…
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Source: Public Plans Database Overview, Center for Retirement Research, https://publicplansdata.org/quick- facts/national/, Retrieved on July 22, 2020.

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Ways to deal with the funding gap

  • Increasing retirement eligibility ages
  • Reducing the generosity of benefit formulas
  • Changing cost-of-living adjustments

Constitutionally protected for current workers

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Source: PBS NewsHour Source: WRAL.com Source: Bloomberg Law

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What we do

  • Build a database of COLA changes between 2005-2018
  • Provide an overview of proportion of plans and state and local

employees who experience COLA changes

  • Estimate the potential impact of COLA changes on retirement

behavior under various assumptions

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Data collection

  • Start with roster of plans from the State and Local Public Plans Database

from Boston College’s Center for Retirement Research (118 state and 82 local plans)

  • Collect COLA rates from the following sources:
  • Legislative records of bills passed in state legislatures
  • Pension plan websites, Comprehensive Financial Reports and other plan documents,

and by contacting plan administrators

  • Harmonized data when appropriate
  • COLAs across 49 plans in 30 states between 2005 and 2018
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Data collection (examples)

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Data collection (examples)

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Population-level analysis

  • Merge plan-level data with American Community Survey (ACS) for

individuals aged 25-80 surveyed from 2005-2018 using sector of employment, location and occupation

  • Match from most specific possibility (plan for certain occupation in a

particular city) to most general (plan for state worker of any

  • ccupation)
  • Example: Chicago teachers pension plan  Illinois teachers  Illinois state

employees

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Representativeness of sample

Table 1. Demographic Characteristics State and Local Public Sector Workers in the ACS and in the COLA Analysis Sample in 2018

ACS Public Employees ACS Public Employees (final 30 states) ACS Public Employees in (final 49 plans with COLA info) Percent Black 14 15 17 Percent Hispanic 12 12 10 Percent White 67 65 67 Percent Female 60 59 60 Average Age 48 48 48 Average Income Wage $45,690 $46,364 $44,716 Percent in labor force 84 85 84 Number of People in the ACS 19,238,167 13,723,853 9,689,654

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Prevalence of COLA changes (plan level)

Figure 1. Fraction of Public Sector Pension Plans with COLA Rate Changes, 2005 to 2018

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Prevalence of COLA changes (population-level)

10 20 30 40 50 60 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Percent

Share of Sample Experiencing Any COLA Change

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Prevalence of COLA changes (population-level)

1,000,000 2,000,000 3,000,000 4,000,000 5,000,000 6,000,000 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Number of People

Number of People Experiencing Any COLA Change

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Direction of COLA changes (population-level)

1,000,000 2,000,000 3,000,000 4,000,000 5,000,000 6,000,000 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Number of People

Number of People Experiencing Positive and Negative COLA Changes

COLA rate change (+) COLA rate change (-)

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5 10 15 20 25 30 25-34yo 35-44yo 45-54yo 55-64yo 65+yo Percent of Total

Age Distribution of Employees Experiencing COLA Change, 2005-2018

Represents 14 million workers

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What may we expect?

  • COLA changes affect the present value of retirement benefits
  • This could impact:
  • Labor supply in the public and private sector
  • Social Security claiming (when applicable)
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Effects on retirement: stylized examples

  • Determine baseline and counterfactual pension wealth for a public

employee with 30 years of service who starts working at 22

  • Baseline COLA  3%
  • Counterfactual COLA  0%
  • Other assumptions: Alternative II SSA Mortality for 1950 Cohort, 3%

discount rate

  • Use change in pension wealth and elasticity of retirement with respect

to retirement wealth to estimate baseline and counterfactual retirement hazards and change in expected retirement age

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Effects on retirement: stylized examples

∆ PV of Ret Benefits ∆ Ret Age (months) Base Case

  • 35.7%

4.66 Mortality Low Mortality

  • 40.0%

5.23 High Mortality

  • 32.8%

4.26 Discount Rate 1.50%

  • 39.0%

5.10 4.50%

  • 32.6%

4.24 Years of Service 25

  • 38.9%

5.09 35

  • 32.3%

4.20 Elasticity 0.05

  • 35.7%

1.42 0.25

  • 35.7%

7.41 COLA 5% --> 0%

  • 54.5%

7.23 1.5% --> 0%

  • 18.9%

2.43

Table 4: Stylized examples of changes in the present value of retirement benefits and the retirement age from COLA changes

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Conclusions

  • COLA adjustments are prevalent in state and local retirement plans
  • Direction of COLA changes lag market conditions
  • Changes in COLAs could substantially effect retirement behavior