COLA Update

Since the 2023-24 state budget includes a third full payment to the pension system, many people are wondering if the COLA reinstatement will soon follow. Considering the high inflation, we are experiencing, retirees are concerned about the diminishing buying power of their pension.

While the Murphy Administration has kept its promises to fully-fund the pension, neither the Public Employees’ Retirement System (PERS) nor the Teachers’ Pension and Annuity Fund (TPAF) are projected to get to the target ratio necessary to reinstate the COLA soon. Chapter 78 states that the COLA for each of the state pension systems will be suspended until the funds reach a “targeted funded ratio” with regards to the plan’s funded status. A pension fund’s funded status refers to the ratio of assets to liabilities. The funded status of each pension fund is calculated separately and is reported in the fund’s actuarial report. For the COLA to potentially be reinstated in a pension fund, the funded status must reach 80%.

When the state made the first full payment to the pension system, Local PERS was funded at 67.6% and TPAF was funded at 41.3%. As of the most recent pension valuations for the 2022 fiscal year, Local PERS was funded at 67.9% and TPAF was funded at 42.1%. Neither fund was much closer to the 80% target. Part of this is because the financial markets had a bad year in FY 2022. But the bigger contributing factor is that the state dug a huge hole by not paying into the pension for two decades and then only partly funding it for some time after that. It will likely take decades of fully funding the pension to get the funded status to 80%.

Due to all the damage caused by prior underfunding, state pension contributions need to remain at or near the current level (100% under Gov. Murphy) through the 2040s, according to the latest long-range projections. Until and unless that funding occurs, we retirees should not expect to see a COLA increase in our pension checks.