How will limiting cost of living adjustments affect the value of state pensions?

During the Illinois General Assembly’s January 2013 special session a proposal to limit the so-called Cost of Living Adjustments (COLAs), a component of public employee pensions, was much discussed and debated. Under current pension rules many state workers and retirees have been promised that the pension benefits they receive will rise by 3 percent per year. This benefit is often described as a COLA but, in fact, is unrelated to the cost of living or inflation and is more properly termed an “escalator” clause. The value of this escalator clause to the pension recipient can be quite substantial. A pension of $50,000 in 2013 would grow by 75 percent to more than $87,000 by 2033 under the current escalator clause. Depending on the rate of inflation during this period, the purchasing power of the pension might either increase or decrease. Those in the General Assembly working on pension reform have introduced legislative proposals to reduce the value of the escalator clause in an attempt to control pension costs in the face of large unfunded pension liabilities. One proposal would have completely suspended the escalator for six years (until 2020) and would have capped the pension subject to the escalator clause at $25,000. This would have meant that anyone receiving a pension of $25,000 or more would have received no increase in their pension until 2020 and would have received a flat $750 — that is 3 percent of $25,000 — per year thereafter. Such legislation would certainly have reduced the value of promised pension benefits for many workers and retirees, but it is difficult to quantify the exact amount of the reduction since it depends on many factors such as the time period considered and individuals’ accumulated benefits.Ope