Entering fixed annual COLA increases for pensions


My wife receives a non-covered pension from a state teachers retirement system. She receives a flat amount, not a percent, of a COLA increase annually (e.g. $800/yr). I entered her pension as non-covered with zero % annual increase in ESPlanner. To account for the annual flat COLA increase, I added a Special Receipts entry of $800 (dollars, not today's dollar) for each and every year from now until she turns 100 (i.e. $800 starting 2015 for 38 years, $800 starting 2016 for 37 years, etc.). I believe that this approach accurately accounts for her yearly total income. However, this technique incorrectly calculates her SS spousal benefit in her later years because these special receipts are not added to her non-covered pension to determine GPO. Also the contingency planning numbers are incorrect because these special receipts do not automatically end at her death.

To adjust for this, I tried to add 38 new $800 non-covered pensions for her (first starting in 2016, second starting in 2017, etc.) but the Pensions & Annuities-Pensions screen only allows the entry of a total of 6 pensions.

Could the program be modified to either: a) allow for entry of a flat/fixed dollar annual increase in pensions, or b) allow for the entry of an unlimited number of pensions?



dan royer's picture

Couldn't you get the amount pretty close or even exact by figuring out what percent 800 is of the amount of the pension? How far off is the default 3% inflation rate if you mark it as 100% covered?

The annual flat amount increase in percentage is a fraction between 1 and 2 of the 2015 benefit. The pension inflation indexation field only allows entry of whole numbers. I assume that the inflation indexation computation is compounded and thereby it would overstate the annual pension increase every year. An annual flat $800 increase will result in a declining % of total pension every year.

I don't understand how entering the pension as "covered" would be a solution. Entering the pension as covered would eliminate the GPO calculation of social security survivor benefits.

dan royer's picture

I'm sorry, when I said "covered" I didn't mean that "covered" box. I just meant that the pension was indexed by a certain amount. In other words if you set the inflation index to 100%, how close is that 3% annual increase to the $800?

My wife has a state pension that typically gets no COLA each year--but then every few years, say every 5 or 10 years, the pension gets an increase. I just leave the index set to 0% and will update numbers if and when they happen.

Your method grossly overestimates your wife's pension in future years as ESPlanner will increase the pension by the rate of inflation each year in a compounded manner.

In your wife's case and mine, ESPlanner should allow the entry of a negative inflation indexation rate, which it does not currently do. If it did, you would enter the assumed rate of inflation as a negative inflation indexation for her pension and the result would be very accurate, except for the periodic (5-10 yr) bump increases. However, in my case, the results would not be accurate because the percentage representing the annual flat $800 would be declining every single year.

To be accurate ESPlanner needs to have the following modifications:
1. Allow the entry of a fractional inflation indexation rate,
2. Allow the entry of a negative inflation indexation rate, and
3. Allow the entry of an annual flat pension increase in lieu of a percentage inflation indexation rate.

dan royer's picture

Maybe I don't quite follow you here. If I set the index at 0%, then it will not increase the pension each year at all. Indeed, I see in my reports a number that decreases each year relative to inflation because the pension is not keeping pace with inflation at all--0%. So if anything, I'm underestimating the lifetime value of the pension. If one is wanting to model a pension that does not get COLA increases (which is what I want to do) then I set the indexation at 0%. If I wanted to model a fraction of my assumed inflation rate of 3%, then I'd enter that fraction such as 20% or 75% or whatever. I don't want a negative inflation rate because the worst case scenario is no cost of living raise at all, which is 0% relative to inflation.

The "Degree of inflation indexation of annual benefits" is not the COLA percent. Rather, as Dan stated, the degree of inflation indexing equals the maximum % COLA divided by your inflation rate. For example, if your pension is increased at the rate of inflation, but not to exceed 2% per year, and your inflation rate is 3%, then your pension is 67% inflation indexed. If your pension is fully indexed, enter 100%.

You can approximate your case by fiiguring an average percent COLA and expressing it as a percent of inflation. For example, if the pension is $50,000, then the flat $800 is 1.6% in 2015. In 38 years it would be about 1.0%. So, if your inflation is 3%, then 40% or 45% degree of inflation indexation would be a good approximation.

We'll put handling a fixed COLA on our to-do list.

Sorry, my misunderstanding. I think got pension inflation indexation confused with earnings growth where if you enter 0% growth the future annual earnings increase by the assumed rate of inflation.

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