Postretirement Adjustments for Inflation
Social Security benefits and distributions of federal pensions are adjusted for inflation each year.(1) Among state and local employees, adjustments for inflation--with the amounts determined by statute--are also common, extending to 55 percent of employees in 1998. Private-sector retirement plans, however, typically adjust benefits on an ad hoc basis. In 2000, only 7 percent of full-time employees in the private sector participated in defined-benefit plans that provided automatic cost-of-living increases. In the early 1980s, when inflation was higher, such increases were much more common. At that time, more than half of employees of medium-sized and large establishments participated in plans that adjusted benefits for inflation. Defined-contribution plans contain no explicit provision for adjustment, but on average, investment returns--a feature of those plans--reflect both inflation and changes in the real (inflation-adjusted) value of assets in the economy.
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The Civil Service Retirement System uses the same adjustment that Social Security does. The Federal Employee Retirement System, which covers all federal workers hired since 1984, reduces the Social Security adjustment by up to 1 percentage point if the adjustment exceeds 2 percent. |
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