Table of Contents (all issues in this
volume)Main indexRETIREES' NEWSLETTER
Fourth Issue: June, 1993
INFLATION AND PENSIONS
by Norm Shklov
THE IMPACT OF INFLATION ON PENSIONS is shown in the following example. The example uses actual data.
The goal of the current pension plan of the University is to provide a retiree with a pension of about 70 per cent of his or her average salary over the final five-year working period. However, the pension is defined in terms of a five-year guaranteed amount on the life of the pensioner only.
If this pension is to be translated into one which provides both joint and survivor benefits, so that the surviving spouse receives a pension of 75 per cent of the original amount, then the original amount is reduced. The amount of this reduction factor will vary, depending on the age of the spouse. However, the factor will be approximately one-fifth, or 20 per cent. Hence, the resulting pension will be .8 x 70%, or 56 per cent of the average salary before retirement.
Next, while there is a provision for increasing the minimum guarantee by a fraction of the increase in the cost of living index, the discrepancy between these two rates of increase can further drastically erode the purchasing power of the resulting pension. In the last ten years, such erosion has in fact taken place.
CASE STUDY EXAMPLE
CONSIDER A PERSON WHO retired in 1982 with a "guaranteed" pension of 70% of a $50,000 salary. His or her joint and survivorship pension, depending of course on the age of the spouse, was approximately .8 of 70% x $50,000 = 56% x $50,000 = $28,000.
Over the ensuing ten years, that pension increased by 22.9%, to 68.8% of $50,000 = $34,400. However, the price level increased by 55.7%. This is shown below:
|
ACTUAL CPI INCREASE |
MIN GUARANTEE INCREASE | |
| 1983 | 5.8% | 2.0% |
| 1984 | 4.4% | 2.0% |
| 1985 | 4.0% | 2.0% |
| 1986 | 4.1% | 2.0% |
| 1987 | 4.4% | 2.0% |
| 1988 | 4.0% | 2.0% |
| 1989 | 5.0% | 2.0% |
| 1990 | 4.8% | 2.4% |
| 1991 | 5.6% | 2.8% |
| 1992 | 3.2% | 1.65 |
| 1982-1992 |
55.7% |
22.9% |
Thus, in terms of current purchasing power, this pension now amounts to 1/1.557 x 68.8 = 44 per cent of the terminating salary in terms of current dollars.
QUESTION: is this the result that was envisioned by the university and the faculty association when the plan was
written? Is it the kind of result that is anticipated for the future in the university's pension?