Friday, May 24, 2024

COLA vs benefit indexing

from the Department of Retirement Systems:

Posted on May 9, 2023

As a retiree, it’s important to know how your pension works. There are certain rules in place that allow your pension to grow over time with the cost of inflation. Two pension features we often get questions about are cost-of-living adjustments (COLAs) and benefit indexing.

All Plan 2 and 3 members receive a COLA every July. But not all plans or members are eligible for the inflation protection of benefit indexing. Let’s look at what these features are as well as the differences between the two.

Cost-of-living adjustment (for all Plan 2 and 3 members)

As a retiree, your pension amount will increase over time because of inflation.

If the cost-of-living has gone up, pensions receive a cost-of-living adjustment (COLA), regardless of how many service credit years you have.

If you’re in Plan 2 or 3 and have been retired at least one year, you’ll receive a cost-of-living adjustment (COLA) automatically each July — no matter how many years you worked.

The maximum annual COLA is 3%. The amount is based on the Seattle area inflation index (CPI-W) and it may be less than 3% if inflation was lower the prior year. Read more about COLAs

Benefit indexing (for Plan 3 and LEOFF Plan 2 members)

The purpose of benefit indexing is to help the value of your pension benefit keep up with inflation while you are deferring it. Benefit indexing is a form of inflation protection you may be eligible for based on what plan you are in and the number of years of service you have. It takes into consideration that your pension is calculated based on a salary amount.

Eligibility for benefit indexing requires you to:

  • Be in Plan 3 or LEOFF Plan 2 and
  • Stop working with a minimum of 20 service credit years and
  • Choose to delay receiving your pension benefit

For every month you delay collecting your pension, your benefit amount will be increased by 0.25%. You will also receive an annual maximum 3% COLA once you retire, as described above.

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