LACERS BOARD UPDATE
By Michael R. Wilkinson, LACERS Commissioner
The LACERS Board has set the Cost-of-Living Adjustment (COLA) that will be effective on July 1, 2022. LACERS sets the COLA based on the Consumer Price Index (CPI) for all urban consumers in the Los Angeles-Long Beach-Anaheim Area as measured by the federal Bureau of Labor Statistics.
The 12-month average increase in this CPI for 2021 over the previous year is 3.8 percent. The COLA is capped at 3.0 percent for Tier 1 members and capped at 2.0 percent for Tier 3 members. Tier 3 members are those who were hired on or after Feb. 21, 2016. Please note that this is an average CPI. The Bureau of Labor Statistics also sets a monthly CPI measuring against the CPI for the previous year. This number can be very different from the average number, especially this past year.
Tier 1 members get the benefit of a COLA bank whenever the CPI is greater than 3 percent. The excess is put in a bank to be used in a future year when the CPI is less than 3 percent. So, most Tier 1 members start this year with nothing in the COLA bank and will add 0.8 percent. If next year’s COLA is 1.0 percent, they would get to tap that COLA bank to get a 1.8 percent COLA.
Many pension plans that have COLAs use a different method or a different measuring time period to set the COLA. I generally hear from members at this time of year asking why we aren’t getting the same COLA that a different plan receives. You have heard the old saw about the “grass is always greener on the other side of the fence.” It applies here.
Some plans use a national CPI, and some set it for a calendar year or another fiscal year. It will be different, but these differences tend to average out over the years. Social Security, for instance, uses a national CPI, the Urban Wage Earners and Clerical Workers. It also uses a non-standard fiscal year to measure it.
A final thought on the reason the CPI used to set a COLA may not be the same as your actual cost of living: The CPI is based on an average which is based on a basket of products and services for food, transportation, clothing, housing, energy, medical expenses, recreation and education.
It’s an average; it isn’t you specifically.
Let’s say your house is paid for, so your housing expenses would be lower than the average, but you bought a new car where the CPI is projecting that perhaps only one consumer in three will buy a new car. This moved you away from the average consumer and your expenses did not match the CPI. Your actual cost of living will likely be more or less than the CPI based on how your costs measure up against the average consumer.