COLA, or Cost-of-Living-Adjustment, is a legally required automatic increase to pensions. Illinois state law has required an automatic annual increase to pensions since 1969. Currently, COLA is a fixed 3% each year (compounded, meaning the prior year’s benefit gets increased by 3%). This increase happens every year, and is supposed to help your pension benefit keep up with inflation and a constantly-rising cost of living during retirement.
The Benefits of COLA
COLA may be something that most retirees don’t think about. After all, it’s largely automated. There’s nothing you need to do other than sit back and reap the benefits. However, COLA is an incredibly important piece of your retirement puzzle. Without annual cost of living adjustments, your retirement savings’ spending power would slowly diminish over the course of your retirement. The dollars you’re counting on to sustain you would become slowly less valuable, and the benefits you receive wouldn’t be worth the same as they were when you first retired.
This could be problematic, especially when you consider that retirees are living longer on average. Everything from your pension to your retirement savings needs to take longevity into account. The last thing you want is to run out of money before you pass away. This is one of the biggest benefits of COLA – it helps to extend the life of your pension to keep up with inflation, which helps you get more bang for your buck in the long run.
How COLA Impacts Your Pension (And AAI Program Option)
Currently, TRS members receive a 3% (compounded) COLA – or annual increase – in their pension. Although COLAs are necessary, they cost money to facilitate. Illinois’ public pension plan, in particular, costs taxpayers a notable amount. Critics of the public pension plan say that the 3% COLA isn’t equivalent to the type of benefits that retirees in the private sector receive. To strike a kind of balance, the AAI Program was enacted in 2018.
The AAI Program offers a 1.5% non-compounded, or “simple”, annual increase, and a payout equal to 70% of the difference between what they would have received in retirement with a 3% compounded increase, versus the new 1.5% non-compounded increase.
Wondering How The AAI Program Cash Payout is Calculated?
Stay tuned! I’ll be covering how the AAI buyouts work, and how your pension benefits will differ if you voluntarily enroll, in my next blog post.
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