US. Inflation is taking a big bite from retirees’ pension income
- Most pensions, unlike Social Security payments, don’t offer a cost-of-living adjustment that keeps pace with the current inflation rate.
- State and local government pensions typically offer up to a 2% or 3% adjustment a year. Private-sector employers that still provide pensions, however, typically don’t offer a COLA at all.
- There may be a tension between enhancing a pension’s adjustment and maintaining the plan’s longer-term financial health.
Inflation is taking a substantial bite from the income retirees get from pensions.
Many pensions periodically increase recipients’ payment amounts by offering a cost-of-living adjustment. But those raises are small relative to the 8.5% annual inflation rate in March, the highest in over 40 years.
Some plans, especially corporate pensions, don’t offer any COLA.
Retirees who rely on pension income are losing purchasing power as a result, unlike those who rely on some other income sources such a Social Security, whose payments try to keep pace with inflation.
“The real value of that pension will go down,” according to Jean-Pierre Aubry, an associate director at the Center for Retirement Research at Boston College. “It will basically buy less at the supermarket than it used to.”
Take this example: A 1% inflation rate would reduce the value of a $25,000 annual pension benefit to $20,488 after 20 years; a 2% inflation rate would erode its original value by a third, to $16,690, according to the National Association of State Retirement Administrators.
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