• June July 16 Main
  • Mort Reinhart
  • Supreme Court Upholds COLA Suspension;
    One Solution: Tax Sheltered Annuities
    On June 9, the New Jersey Supreme Court in a 6-1 vote upheld the suspension of  retiree cost-of-living benefits that was part of Chapter 78, PL 2011. The Court found that the cost-of-living benefit was not part of the “non-forfeitable” benefit (one that could not be reduced) that was the centerpiece of a law passed in 1997. Instead, the Court found that the 1997 law was silent on the cost-of-living benefit and, therefore, did not apply a “non-forfeitable” status on it and it could be suspended until the funding status of the retirement plans (Teachers, Public Employees, Police and Fire, Judiciary and several others) reached 80%. With most New Jersey public systems currently funded in the 50% and 60% ratio, it will take innumerable years to reach the point where restoration of the cost-of-living is possible.

    This decision was the second one by the Supreme Court which allowed the Christie administration to decimate the parts of Chapter 78 that required the State to increase pension funding over a seven-year period in return for increased employee pension and health premium contributions.

    The result of the two Court decisions was that employees wound up paying more for pension and health benefits while the State was able to ignore its increased pension obligations and was successful in suspending the cost-of-living benefits. So much for legislation that appears to be an equitable bargain between government and employees.

    There are several avenues that might be taken by retirees in the coming years to alleviate the elimination of the cost-of-living benefits, although none is an efficient as having a cost-of-living benefit clause in the plan. In future articles, I will touch on a few of them.

    While the suspension of cost-of-living adjustments for all current and future retirees (Chapter 78) has a draconian effect on those who have been retired for many years, new retirees might be able to provide a personal “cost-of-living” adjustment for themselves by using their tax-sheltered accounts wisely in one of two ways.

    If a retiree tracks the national Consumer Price Index as reported each year in January, she can withdraw an amount each year equivalent to the rise in the CPI to supplement her pension. Using the example above of a pension of $61,672 and assuming an inflation of 2% in her first year of retirement, our retiree can withdraw $1,233 (2% of $61,672). Her second year pension would then be $62,905 ($61,672 plus $1,233 = $62,905), thereby negating the effect of  inflation. The following year, with inflation rising 1.5%, she can withdraw $943 (1.5% of $62,905) from her tax-shelter and add that to her $62,905, making her income the next year $63,848 ($62,905 plus $943 = $63,848). Following this method each year in the future provides the retiree with a compounded personal “cost-of-living” adjustment and permits her to try to keep up with inflation.  
    The second way to try to keep up with inflation uses the same method, except that the adjustment is always based on the original pension. In this scenario, the percentage of inflation adjustment each year uses the original $61,672 to calculate the dollar amount. The first year with 2% inflation would be calculated in exactly the same manner as above (2% of $61,672), resulting in a pension of $62,905. In the second year, using the 1.5% inflation rate, the amount of the withdrawal would be $925 (1.5% of the original $61,672), making the next year’s pension $62,597. The following year’s calculation would still use the original pension of $61,672 as the basis for the percentage of adjustment. This method does not have the compounding effect of the first method, but is another way of providing some personal “cost-of-living” adjustment. The Division of Pension and Benefits used a similar method with a slight twist (increasing the original pension each year by a factor) when the State was providing cost-of-living adjustments to retirees prior to Chapter 78.

    It should be noted that the longer the retiree lives, the larger the amount that will have to be withdrawn from the tax-shelter each year.   

    Sadly, for those who retired many years ago without the benefit of tax-sheltered savings and who need the cost-of-living adjustment most, the ability to provide a personal “cost-of-living” is limited. For them, Chapter 78 was devastating.