COLA vs benefit indexing
Your pension is designed to grow over time to help keep up with inflation. All Plan 2 and Plan 3 retirees are eligible for a cost-of-living adjustment (COLA) every July. However, only Plan 3 and LEOFF 2 members can qualify for benefit indexing, which helps your pension grow with inflation before you retire.
Here are the key differences between COLAs and benefit indexing.
Cost-of-living adjustment (for all Plan 2 and 3 members)
When the cost of living rises, pensions receive a cost-of-living adjustment (COLA), no matter how many years of service credit you have. The adjustment amount is based on the previous year’s Seattle area inflation index (CPI-W) and may be less than 3% if inflation was lower. Find out more about COLAs
If you’re in Plan 2 or 3 and have been retired at least one year, you’ll automatically receive a cost-of-living adjustment (COLA) each July — no matter how many years you worked.
Benefit indexing (for Plan 3 and LEOFF Plan 2 members)
Benefit indexing is a type of inflation protection that you may be eligible for depending on your plan and years of service. For every month you delay collecting your pension, your benefit amount will increase by 0.25%. Benefit indexing stops once you’ve reached your normal retirement age. Once you retire, you’ll be eligible to receive an annual maximum 3% COLA, as described above.
Eligibility for benefit indexing requires you to:
- Be in Plan 3 or LEOFF Plan 2
- Have at least 20 service credit years before you stop working.
- Separate before reaching normal retirement and delay receiving your pension benefit.
Example
Francis is a Plan 3 member who is 64 years old, with 20 service years and an average monthly salary of $5,000.
Their Plan 3 benefit calculation is: 1% x 20 years x $5000. This would provide Francis with $1,000 per month.
In addition to a monthly pension, Francis also has an investment account to draw from in retirement.
Francis also has the option to stop working prior to age 65 but choose not to receive a pension benefit until their first eligible unreduced date of age 65. During that time, their pension will grow. Here are two scenarios of how that could look:
Scenario 1:
Stop working at age 64
Start collecting a pension at age 65
The pension benefit increases about 3% in one year (.25 x 12 months = 3)
The pension is $1,030/month
Scenario 2:
Stop working at age 65
Start collecting a pension at age 65
The pension benefit calculations is: 1% x 21 years of service x $5,000
The pension is $1,050/month
A note about Plan 3:
Plan 3 has two separate accounts: An employer-funded pension, and an investment account you fund with your contributions.
The main reason customers choose Plan 3 are: personal control and growth potential. Plan 3 customers have separate pension and investment accounts, which means they can withdraw funds from one without affecting the other. In the example above, Francis could withdraw an income from the investment account at any age once they separate from service.
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