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Retirement system explains COLA formula; estimates 2% COLA expected this July, warns 3% proposal adds substantial cost
Summary
ERS showed how a hurdle‑rate formula determines annual COLAs and illustrated that with current assumptions a 2% COLA is expected this July; ERS said a separate bill that would mandate 3% annual COLAs (SB339) carries an approximate $500M annual cost that would be incremental to existing prefunding.
Jim Potvin, executive director of the Employees Retirement System of Georgia, explained to senators how ERS calculates annual cost‑of‑living adjustments (COLAs) and why the system currently uses a formula tied to investment returns and funded ratio.
Potvin described a multi‑step formula that uses a five‑year actuarial rate of return, subtracts a hurdle rate (currently 6%), and then applies a shareable factor based on the system’s funded ratio tier (25% share in the 70s funded range; 50% share in the 80s range). The resulting amount is compared to a Social Security COLA figure and the lower of the two is used; the outcome is rounded to the nearest quarter‑percent.
Using that method, Potvin said ERS calculated a 0.5% COLA under example assumptions with a funded ratio in the mid‑70s and a five‑year return of about 8.45%. He also walked the committee through a second example using a 9.9% five‑year return and an estimated funded ratio of about 82%, which produces a shareable excess and an expected COLA that rounds to 2% for the upcoming July payment.
Potvin noted the state began prefunding future COLAs in 2022 with an added $150 million annually, which ERS projects will yield an average ongoing COLA around 1.15% under current assumptions. He said the $150 million prefunding figure does not reduce the fiscal cost of a separate legislative mandate to require a flat 3% annual COLA; ERS’s fiscal analysis estimates that fully funding a statutory 3% COLA would require roughly $500 million in additional annual contributions.
Committee members asked whether the formula or hurdle rate could be adjusted to increase COLAs in better investment years; Potvin confirmed those levers exist but emphasized the trade‑offs and the need for actuarial study before any change. No committee vote was taken; Potvin offered to provide deeper actuarial detail to members who requested it.
