Pension #'s: not quite inflation adjusted, but??

[PandaBear]

When I retire, I will have a pension that is not inflation adjusted. What it does do is this:
1. A 2% increase, adjusted yearly.
2. In addition to the annual benefit adjustment, one-year supplemental benefit payments, paid in quarterly installments, support your retirement benefit’s purchasing power. The plan makes these payments to retired members and beneficiaries whose benefits have fallen below a certain level of purchasing power. Purchasing power protection level is currently set at 85 percent of your initial benefit (base allowance).

How would you characterize this for something like the calculator? Would you consider this inflation adjusted, or not?

 

[Sunset]

I would treat it as non-inflation adjusted, if the numbers calculate out a success, you will be even a better success.
If inflation ever gets back to 12% , the 2% will look pretty small, and you will be glad you treated the pension as non-inflation protected.

 

[njhowie]

2. In addition to the annual benefit adjustment, one-year supplemental benefit payments, paid in quarterly installments, support your retirement benefit’s purchasing power. The plan makes these payments to retired members and beneficiaries whose benefits have fallen below a certain level of purchasing power. Purchasing power protection level is currently set at 85 percent of your initial benefit (base allowance).

This in itself is the definition of inflation adjusted.

To me, it looks like what you'll be getting is an annual adjusted 2% increase + inflation adjusted if that adjusted 2% does not keep up with inflation. That additional inflation protection kicks in once cumulative inflation reaches 15% above the cumulative 2% increases from the start of payments (subject to later adjustment).

Further, the Fed looks to keep inflation at a 2% target. For the past 10 years it has not even been meeting that, it's been running lower than 2%. Should it get much above 2%, the Fed would act to bring it back down. So, the annual 2% increases will generally be in line with inflation unless things get wildly out of control of the Fed.

Does it indicate how both #1 and #2 are adjusted over time? What formulas are they using?

I would treat the pension as inflation adjusted for the calculator.

 

[pb4uski]

Run it both ways... both inflation adjusted and not to see how sensitive the success rates are to the inflation adjustment.

With all that you said, it sounds closer to inflation adjusted to me... albeit more complicated than most.

 

[ronin]

Sounds like a CalSTRS pension. If so, the 2% is fixed on the original pension benefit in yr 1 and does not compound. So that value is eroded by inflation over time. I ignore it for planning purposes. The purchasing power protection value depends on realized inflation over a fairly long period of time. At a 2% rate of inflation, you're looking at around 14 yrs before it might kick in. At least that was my calculation 10 yrs ago. With inflation running below that for some of the past 10 yrs, that has been pushed farther out (more like 21 yrs from original retirement date at this point). Another potential risk is that it is not constitutionally guaranteed like the pension annuity payments are. For what that is worth, on the chopping block it would be lower hanging fruit.

 

[38Chevy454]

I agree it is closer to inflation adjusted, but not fully 100%. If inflation is equal or less than 2% you are completely inflation adjusted. If inflation is over 2%, then you get 85% of that difference. So over time you do lose a little. But still that is better than most pensions that do not have any inflation adjustment, or a smaller amount than what you can receive.
For planning, it is probably nice to just consider it as non-adjusted, knowing that you will get some extra. If the numbers are good non-adjusted, the extra just gives you more assurance.

 

[njhowie]

If inflation is over 2%, then you get 85% of that difference.

The language could be made clearer, but as written that is not what it means.

The way I read it, it says that inflation could be 16% in year one (for example), and it would not kick in, as 16% - 2% = 14% which is 86% of initial benefit. It is above the 85% threshold. If instead, inflation in year one were 22%, then the clause would apply, as 22% - 2% = 20%, which would be 80% of the initial benefit, and so a 5% additional payment would be made.

Obviously inflation will not be anywhere near the numbers I used, I only used them as reference to make the point.

 

[PandaBear]

Sounds like a CalSTRS pension. If so, the 2% is fixed on the original pension benefit in yr 1 and does not compound. So that value is eroded by inflation over time. I ignore it for planning purposes. The purchasing power protection value depends on realized inflation over a fairly long period of time. At a 2% rate of inflation, you're looking at around 14 yrs before it might kick in. At least that was my calculation 10 yrs ago. With inflation running below that for some of the past 10 yrs, that has been pushed farther out (more like 21 yrs from original retirement date at this point). Another potential risk is that it is not constitutionally guaranteed like the pension annuity payments are. For what that is worth, on the chopping block it would be lower hanging fruit.

It is a CalSTRS pension. Thank you. I just discovered this information and didn't even realize the factors you mentioned.

 

[PandaBear]

Run it both ways... both inflation adjusted and not to see how sensitive the success rates are to the inflation adjustment.

With all that you said, it sounds closer to inflation adjusted to me... albeit more complicated than most.

The inflation adjustment makes a HUGE difference, which is why I wanted to make sure how I consider it.