One of the most common questions we receive from retirees relates to increases in their pension. Many retirees are surprised to learn that the ASRS was not designed to provide yearly post-retirement benefit increases.
The ASRS, by statutory design(1) is meant to be one of three forms of retirement savings in a member’s overall retirement portfolio (ASRS pension, Social Security, and personal savings). This is commonly referred to as the three-legged stool. As a member of the ASRS, retirees have already contributed to ASRS and Social Security. Most also had access to supplemental retirement savings programs during their working career.
If you’re asking what this means in practical terms and whether your pension will ever increase, the short answer is: possibly. Here is what the ASRS defined benefit plan does and does not include as it relates to postretirement benefit increases:
Cost of Living Adjustments (COLA’s)
There is no provision in the design of the ASRS plan for retirees to receive COLAs, nor did your contributions ever fund one. A COLA is a benefit provision designed to offset the effects of inflation. The design of the ASRS plan instead assumes you will receive a COLA through your participation in Social Security(2) and that you will also have some personal savings available to guard against the effects of inflation.
Permanent Benefit Increases (PBI)
The ASRS does have a provision to provide a permanent benefit increase to retirees if investment experience meets the conditions to grant one.
Who is eligible for a PBI?
• Eligible: If the date you first joined the ASRS is prior to September 13, 2013, you are eligible for a PBI and will receive one if conditions permit, and you have been retired for more than one year.
• Not Eligible: If the date you first joined ASRS is on or after September 13, 2013, you are not eligible for a PBI. Any post-retirement benefit increase for this group would need to be granted by the legislature.
For eligible retirees: What conditions are needed to trigger a PBI distribution?
• When the 10-year actuarial returns exceed 8%, excess earnings are placed into a separate fund for PBIs.
• When the fund is sufficient to pay a permanent benefit increase to eligible retirees, a permanent benefit increase is paid.
How is the PBI calculated?
When conditions for a PBI are met, the actuary will determine: how much is available, who is eligible for an increase, and the dollars per year of service used in the calculation. The calculation is: (Dollars x Years of Service) divided by 12 = monthly increase
($$ x Y of S) / 12 = MI
When will eligible retirees receive a PBI?
In the past several years, the ASRS has met the threshold to put a small amount of excess funds aside for future PBIs. A PBI was recently made possible and was applied to eligible retirees beginning with their July 2022 benefit check. Based upon the plan's actuarial valuation for fiscal year ending June 30, 2022, there are insufficient funds to provide for a Permanent Benefit Increase for the new fiscal year, which begins July 1, 2024. If market conditions are favorable over the next several years, we are hopeful that the PBI fund will be sufficient to pay a PBI to eligible retirees. |
(1) Arizona Revise Statute 38-712 can be found online at www.bit.ly/38-712
(2) Information on Social Security’s cost-of-living adjustment for 2021 can be found at SSA.gov/cola
by Sara Orozco, Strategic Planning
Updated 1/22/2024
