Will Your Pension Payment Decline?
If you're used to getting an annual cost of living adjustment (COLA) in your pension payments, what happens to your pension if the economy experiences deflation?
This isn't a question that many people have thought about. For so long, inflation has been a part of our economic landscape that most retirees really haven't considered what happens if the cost of living actually declines. Brett Goldstein, a pension administrator and president of The Pension Department in Plainview, NY, thinks that it's possible your pension payment could be reduced.
Here's how that might happen:
- Let's say your pension benefit is adjusted each year for the Consumer Price Index (CPI). If you've been following the news lately, you probably know that the CPI has been slightly negative for the last year, meaning the cost of living has actually gone down by a little more than 1 percent.
- So if your pension is adjusted by the CPI, does that mean it will decline by 1 percent going forward?
- Well, that all depends on how your COLA formula works.
Fixed Adjustment. Some pension plans provide for a fixed COLA each year, such as two percent, regardless of what happens with the CPI. In those cases, there shouldn't be any change and you should continue to receive the same COLA.
"Banking" Adjustments. Some pension plans allow for a COLA each year, but put a ceiling on the increase, such as two percent. That means if the CPI is four percent, you only get a two percent adjustment. But in some plans, you can bank the unused CPI figures.
- Assume inflation was four percent and you only received a two percent adjustment. Your plan may allow you to "bank" the two percent you didn't use.
- Let's assume that next year the CPI comes in at zero percent, you might still get a two percent COLA because you had two percent "banked" from a prior year.
- Other plans may allow for partial banking or adjustments.
Bottom line. The best way to confirm how a decline in the CPI might affect your pension payments is to check with your pension plan administrator. Many pension plans do have COLA items under the FAQ section on their websites, but they don't often directly address what happens in the event of deflation.