About pensions

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When I enter the pension as an annual amount in today's dollars, in the report, the amount is reduced for the subsequent years. I assume this is to reflect the inflation rate or the lower value of the dollar, but the reduction happens irrespective whether I include the inflation rate or not and it even happens when I set it to zero%. Where is the percentage reduction coming from on the report?

Another question I have is the pension feature does not include a COLA option. Most bargaining agreements and pensions have some % of increase to counter inflation/COLA increases. Is there a place to add it so that that the pension increases after each year or at the very least cancels out the inflation? If not, is it possible to include the feature in the next release?

Thanks.

Ravi

Comments

dan royer's picture

Hi Ravi:

If you are taking your pension beginning this year, and you know it's, for example, 10K, then you enter it as 10K in today's dollars (or dollars for that matter since in the current year they are the same). But if you are taking the pension say two years from now and you know that in two years the pension will be 10K in dollars, then you'd enter it in "dollars" since you probably wouldn't assume that they are giving you a today's dollar amount--instead they are giving you the nominal amount, the amount written on the check that will come in two years. If instead, you enter 10K in today's dollars to begin two years from now, you will see that it gets entered with that adjustment relative to today's dollars.

The COLA adjustment is created in the field that is labeled, "degree of inflation indexation of annual benefits." If you leave it at the default 0%, then the number you enter will go down each year in the report as the reports are in today's dollars and without any cost of living adjustment, you lose earning power in today's dollars. If you set it to 100%, then you'd see the value of that pension hold its own against inflation, remaining the same 10K all the way down the column. In nominal terms (dollars) it will be a bigger check each year, but our reports are in today's dollars so you are seeing the real value of that amount, not the nominal value. That's how you want to see it.

If your pension keeps up with inflation only a little bit, say those in charge of the pension give it a little bump every few years, you might for example enter the indexation at 50% or 20% meaning that if inflation is at 3%, each year you'd get a 1.5% adjustment (50%).

So a pension that increases with inflation each year, keeping up with it, should be entered as indexed to inflation at 100% and you will then see, in my example, a 10K pension staying at 10K all the way down your column report indicating that it's worth 10K relative to today's dollars even twenty years from now. This will require that the amount written on the check (the nominal dollar amount) be much larger than 10K in order to give you that purchasing power, but we don't worry about nominal dollars. We care about the real purchasing power of that money relative to the year you are creating the report.

I hope that helps.

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