Cumulative Cost-of-Living Adjustments (COLAs)
How COLAs Work
Missouri law provides that the overall lifetime increase in your retirement benefit that results from COLAs cannot exceed 80% of your original monthly benefit amount. For example, if your original monthly benefit amount was $100, your monthly benefit amount cannot increase more than $80 as a result of COLAs.
To determine how much of an overall (cumulative) COLA increase you have received, you cannot simply total the COLA percentages that have been given over the years.
This is because only the first COLA you receive is based on your original monthly benefit amount under the retirement plan you selected. Since January 1991, subsequent cost-of-living increases are calculated by multiplying your current monthly benefit amount (at the time of the COLA) by the percentage of COLA increase. Each subsequent COLA percent increase is figured on the new, larger benefit amount created by the previous COLA(s). The result over time is a compounding effect that causes the overall percent increase in the monthly benefit to be higher than the total you get by simply adding together all of the COLA percentages you have earned over time.
An example is found below.
COLA % |
Benefit Amount |
% of Original Benefit |
||||
|---|---|---|---|---|---|---|
| Before COLA Original Benefit |
$100.00 |
100.00% |
||||
| 1st COLA New Benefit |
2.30% |
x |
$100.00 |
= |
+$2.30 $102.30 |
102.30% |
| 2nd COLA New Benefit |
1.70% |
x |
$102.30 |
= |
+$1.74 $104.04 |
104.04% |
| 3rd COLA New Benefit |
2.00% |
x |
$104.04 |
= |
+$2.08 $106.12 |
106.12% |
| 4th COLA New Benefit |
3.70% |
x |
$106.12 |
= |
+$3.93 $110.05 |
110.05% |
| 5th COLA New Benefit |
3.30% |
x |
$110.05 |
= |
+$3.63 $113.68 |
113.68% |
Total COLA % = 13.00% |
Total Compounded COLA % = 13.68% |
|||||
As you can see, the actual compounded COLA percentage you receive (13.68%) is greater than the total of COLA percentages (13.0%).
NOTES:
- Missouri law provides that COLA increases cannot exceed 5% per year.
- Ad hoc legislative increases in recent years are not included in the lifetime COLA cap.
- For more information on COLAs or your retirement account, contact us by phone at 800-392-6848 or by email at member_services@psrsmo.org.
