Indiana should move from ad hoc public retirement benefit increases to a long-term approach that guarantees former public employees a 13th check or cost of living adjustment, or COLA, annually, an interim committee recommended Tuesday.
But who gets what—and how much the proposal will cost the state—will depend on a yet-to-be-determined cutoff date and a myriad of other decisions, according to the Indiana Public Retirement System.
“I’m going to view this as the vision (or) the roadmap going forward,” Sen. Brian Buchanan, a Republican from Lebanon, told reporters. He chaired the Pension Management Oversight Interim Study Committee.
“There’s a lot of discussions, a lot of details, that will need to be attended, (and) a lot of data. We’re going to have to analyze and determine the specifics,” Buchanan added.
Lawmakers have traditionally offered former employees either a 13th check or COLA during two-year budget cycles—but didn’t last year, angering many.
Pensions offer flat amounts over the course of one’s retirement but, due to inflation, rarely keep up with the costs of living. Other types of government payouts for the elderly are annually adjusted, including Social Security, which saw a 8.7% adjustment last year following a record-breaking 9.1% inflation peak in June.
Pensions to roughly 97,000 Indiana retirees are determined by years of service spent working for state government, from teachers and law enforcement to gaming agents and conservation officers.
While both the COLA and 13th check seek to augment retiree pensions, they do so in different ways. The 13th check is an additional, one-time check on top of the year’s other monthly payments while the COLA is a percentage increase for all payments moving forward.
INPRS Chief Actuary Andy Blough noted that there are multiple ways to design an approach split between 13th checks and cost of living adjustments.
He outlined an example proposal—based on 2021 data—giving those who retired before July 1, 2021, annual 13th checks indexed to a 2% inflation rate. In that scenario, “future” retirees would get a 1% COLA.
Such post-retirement benefit increases must come out of segregated supplemental allowance reserve accounts. Indiana law limits payroll surcharges to finance those increases to 1%.
In Blough’s example, to pre-fund the new benefits, the surcharge rate would need to rise to a maximum of 2%. If the proposal were implemented, the rates would initially be higher but would fall afterward, according to Blough.
Despite the boosted benefits, the funded status for the funds involved would improve more than if lawmakers maintained the ad hoc approach because INPRS would have a long-term funding strategy for the increases.
Contribution rates would remain the same for the funds in the short term, but could go up in the long term. That’s except for the Pre-1996 Teachers Retirement Fund, which has exhausted its financial cushion and would see impacts immediately. In Blough’s example, rates for that fund would rise from 6.4% to 8.2%.
He noted that the model required further research, however: it didn’t show risk or variability.
Buchanan said the committee arrived at a split approach after taking a “deep dive” into the issue, considering numerous scenarios and consulting stakeholders.
“We feel this is the best path forward,” Buchanan told reporters.
Public retiree groups weigh in
Many retirees depend on benefit increases to keep up with rising costs of living, said Jessica Love, leader of the Retired Indiana Public Employees Association. Her organization represents about 40,000 Public Employee Retirement Fund members.
The group’s members report that, on average, about 90% of their income is from PERF and Social Security, according to Love.
“They have come to depend on the 13th check,” she said. Most longtime employees prefer the check because the amount rises based on years of service.
Laura Penman, who leads the Indiana Retired Teachers Association, said her organization was “disappointed” in the rocky transition.
“When nothing was given for retired educators, unfortunately, my members took that to mean that you didn’t care. You didn’t care about them, and you didn’t care about the time they spent in the classroom,” Penman said.
Since meeting with a variety of lawmakers, Penman said she knew they did care.
“We know that you want something for our retired educators, but it goes back to: what can the state of Indiana afford, and what is sustainable?” she added. Penman suggested giving the COLA a minimum and maximum, and somehow incorporating years of service.
She said that while there’s room for improvement, retirees can rely on the money they do receive.
“Our members know that their pensions are stable, unlike a lot of states surrounding us,” Penman said. “I feel confident that if I’m fortunate enough to live to be 90 years old like my (retired teacher) mother, my pension will never go away.”
Some committee members were openly skeptical of the proposal, though they approved it 15-0.
Sen. Eric Bassler, a Republican from Washington, said he only voted in support because the committee report isn’t binding. It recommends that lawmakers “consider” such legislation.
“I’m concerned that we haven’t yet met our current pension obligations—our pension liabilities—and we’re talking about taking on more pension liabilities for the taxpayers of Indiana,” Bassler said. He added that he was “very hesitant,” despite his “aye” vote.
Committee Vice-Chair Rep. Jeff Thompson—who leads the powerful Ways and Means Committee during session —said picking a cutoff date would be key in ensuring the transition is financially feasible.
And the proposal comes with a long transition even it finds its way into law during the 2025 session: INPRS expects a 12- to 18-month implementation period, Buchanan said.
It’s unclear if pensioners will receive any stop-gap benefits.
Asked if the Legislature would authorize another two-year 13th check or COLA, Buchanan told reporters, “Traditionally, we have not done anything like that in a non-budget year.” But he said that short-term measures weren’t his committee’s focus.
Thompson told reporters he was “not sure” about relief in the coming session, adding, “There’ll be some discussion there, I’m sure.”