How to Calculate the Cost of Living Adjustment for CT State Employees
Connecticut clients preparing for retirement often ask me about Cost of Living Adjustments (COLA) and how they apply to various retirement benefits. Two main retirement benefits receive a cost of living adjustment:
Social Security
Specific Pensions
Inside this article, you’ll learn about the Cost of Living Adjustment and how the state of Connecticut uses the calculation. This information is especially helpful if you or a loved one have a pension through the State of Connecticut.
Here’s what you’ll discover in this article:
What is a Cost of Living Adjustment (COLA)?
How is Connecticut State Retiree’s COLA Calculated?
Prediction for Future COLAs
What is a Cost of Living Adjustment?
The intention of the Cost of Living Adjustment is to help retirement benefits keep pace with inflation. This is important because Social Security and State Pensions are the primary income source for many state retirees. When inflation rises, expenses, including food, utilities, automobiles, and real estate, also increase. Therefore, a retired individual would have to use a larger portion of their retirement benefit to cover their living expenses, effectively leaving them with less leftover money. This constraint on discretionary retirement funds could be inconvenient for some and detrimental for others.
Plenty of retirees are currently scraping by using the full amount of their pension benefits. So, what happens when you no longer have enough to cover your living expenses? Well, it could cause these retirees to delay payment on any obligations and shift their focus to conservation of funds rather than living their lives.
How is the CT State Retiree’s COLA Calculated?
To calculate, you must determine your Connecticut State Employees Retirement System Tier. Connecticut employees are divided into four tiers: I, II, III, and IV.
Tier I includes state employees hired on or before July 1, 1984.
Tier II is further divided into two sections — consisting of employees hired between July 2, 1984 and June 30, 1997. Tier IIA is for employees hired between July 1, 1997, and June 30, 2011.
Tier III includes employees hired between July 1, 2011 and July 30, 2017.
Tier IV employees were hired on or after July 31, 2017.
The COLA calculations for ConnecticutCT Tiers I, II, and IIA are the same. The increases are applied on the first of January or July, depending on the individual’s start date. If you received your first COLA in January, then that’s when you would receive the COLA going forward. The available COLA to these two tiers ranges from a minimum of 2.5% and a maximum of 6%. The calculation uses 60% of the annual increase in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) up to 6% plus 75% above 6%. If the increase in CPI-W were 8% in a given year, then the individual would receive a COLA of 5.1% (COLA = ((60%*6%)+(75%*2%))). Therefore, if CPI-W is increased by more than 9%, then the individual should receive the maximum COLA of 6%.
Exploring the similarities between Tiers I & II and Tier III.
The adjustments are still being made in January or July and will be applied to the same month each year. The minimum COLA also stays constant at 2%, but the maximum increases to 7.5% for Tier III. The calculation is also the same, using 60% of the annual increase in the CPI-W up to 6% plus 75% of the increase above 6%.
To contrast the example above, if the CPI-W increased by 10%, then the retiree would receive a COLA of 6.6% (COLA = ((60%*6%)+(75%*4%))). Increases in CPI-W above 11% would result in the individual receiving the maximum COLA of 7.5%. As you can see, the more recent hires are allowed a larger maximum COLA than those hired earlier as inflation fears grew.
Tier IV COLA calculation.
For Tiers I, II, IIA, and III, the first COLA is applied after at least nine months, starting in January or July (whichever comes first). However, Tier IV had a key change. Instead, retirees don’t receive their first COLA until they’re 30 months into retirement. This means that the timing of COLAs changed from less than one year to two and a half years.
The calculation itself sees two other key differences compared to the other tiers. First, the COLA minimum changed. If CPI-W increases by less than 2% in a given year, then the COLA adjustment applied is the actual increase in CPI-W, if any, which means that retirees can be subject to 0% COLA in select years.
However, if CPI-W increases by more than 2%, they will receive a minimum COLA of 2% and a maximum of 7.5%. The calculation itself remains constant, but the second key change is a clause regarding the first 18 months of retirement. If the CPI-W increases by more than 5.5% in the retiree’s first 18 months of retirement, then they’ll be allowed a COLA before the listed 30 months. Therefore, the Tier IV retirees will receive a COLA earlier in extreme situations, as a CPI-W increase of more than 5.5% is uncommon.
Here are some links for further reading about each Connecticut State Retirement System Tier:
Tier I: Connecticut State Employees Retirement System Tier I Summary Plan Description.
Tier II: Connecticut State Employees Retirement System Tier II Summary Plan Description
Tier IIA: Connecticut State Employees Retirement System Tier IIA
Tier III: Connecticut State Employees Retirement System Tier III Summary Plan Description (SPD)
You don’t need a crystal ball to predict your cost of living in CT.
Prediction for Future COLAs
It’s impossible to know what will happen in the future, but we can use the current facts to assist our analysis. Inflation ran rampant in 2022 as we saw the core Consumer Price Index (CPI) hit its highest mark in over 10 years. One of The Federal Reserve’s mandates is to manage inflation, and the way to bring it back down to its preferred 2% level is through restrictive monetary policy. One key strategy is through the increase of the Federal Funds Rate, which makes borrowing money more expensive. This, in turn, will generally slow down economic activity, which will then slow inflation. As of December 2023, the Federal Funds Rate stands at 5.5%. The Federal Reserve has indicated that inflation is lessening and they will likely begin to lower the Federal Funds Rate in 2024.
If the recent trend of lowering inflation continues to hold true, then we could assume that inflation will continue to decrease in 2024 and beyond. Remember, the COLA calculation for CT State Employees uses the increase in CPI-W year over year. The recent monthly year-over-year changes in CPI-W show a 2.6% change from November of 2023 compared to November of 2022. We will have to wait until the December 2023 CPI-W is announced on January 11, 2024.
If you’re part of Tiers I, II, IIA, or III, then you’d likely receive the minimum COLA of 2%. For Tier IV retirees, there’s a decent possibility that you won’t receive a COLA increase for 2024, as when the increase in CPI-W is less than 2%, there’s a 0% COLA. I’ll promise to update this article once the December CPI-W is announced.
As a Financial Planner, I specialize in helping clients 55 and older plan for retirement. We focus on helping clients in 3 key areas: retirement planning, investment management and tax planning. In a free consultation, we’ll review your situation and determine if my expertise fits your financial goals. I love working with Connecticut State retirees, as my Grandfather was one. I’ve helped many plan and manage their retirement from The State of Connecticut.
Curious to see what some expert retirement planning advice could do for you?
Read more articles like this one:
