Learn about 13th Checks and COLAs
The methodology behind how pension benefit increases and one-time distributions are determined was established by the Indiana General Assembly in 2018.
Managing income in retirement can be challenging, especially as inflation impacts your budget for essential expenses.
INPRS knows that the lifetime guaranteed pension benefit you receive each month provides some comfort, but its consistent amount does little to keep up with inflation. For many years, retirees receiving defined benefit payments from the Public Employees Retirement Fund, the Teachers’ Retirement Fund, the State Excise, Gaming, and Conservation Officer Fund, and Legislators' Defined Benefit Plan have been granted a 13th check based on legislation passed by the Indiana General Assembly. A cost-of-living adjustment (COLA) had not been approved since 2009. The one-time allocation of a 13th check or lifetime benefit increase through a COLA had been funded by each fund’s assets, using contributions from employers that included assumptions for future COLAs. This system worked for many years, but the Indiana General Assembly wanted more accountability in the funding and usage of these post-retirement benefits.
Each fund’s assets are used to pay earned benefits specifically for its members. This fund contains the balance of employer contributions and investment returns that allow INPRS to fulfill its promise to pay earned benefits. Previously, an assumed COLA cost was built into the PERF Hybrid, TRF Hybrid, EG&C, and LE DB plan rates paid by the employer. This practice of assuming a future increase presented a risk that post-retirement benefit increase amounts would be larger than assumed.
After years of conversation on the matter, in 2017 the Interim Study Committee on Pension Management Oversight of the Indiana General Assembly began discussions with INPRS on how to reduce this risk while providing a reliable, safe method of administering COLAs and 13th checks that limited the risk to each fund’s ability to pay the basic promised benefits under each fund. After many discussions, the idea of a separate account dedicated specifically to the collection of funds to support the administration of COLAs and 13th checks was proposed as new legislation.
In the 2018 legislative session, four Supplemental Reserve Accounts (SRAs) were established to administer post-retirement benefit increases and one-time distributions for PERF Hybrid, TRF Hybrid, EG&C, and LE DB plans. Funded by contributions from the Hoosier Lottery and supplemental contributions paid by employers, the SRAs are savings accounts dedicated to protecting the purchasing power of INPRS retirees’ monthly benefits. INPRS determines these supplemental contributions by balancing out each fund’s expected cost for their post-retirement increases and statutory limits on the amount that can be collected. Each year, the Hoosier Lottery contributes to this account. In fiscal year 2021, employer contributions to the SRAs totaled approximately $28.5 million and the Indiana General Assembly provided a one-time contribution of $50 million from the state’s General Fund.
Rules were developed to help protect the balance of the SRAs and the future benefit increases for INPRS retirees. Established in state statute, the balance of the SRA must be able to fund the entirety of any new benefit increase or one-time payment. If there are any shortfalls from prior benefit increases, those shortfalls must be filled in before a new one can be granted.
During legislative sessions where the state budget is set, the Indiana General Assembly considers the SRA’s ability to support a COLA or 13th check. If the SRA’s balance is insufficient to supply an increase, none is granted. If the balance of the SRA can pre-fund the request, the change goes through the legislative process and, if approved, is administered by INPRS in accordance with the law. Any post-retirement benefit change or adjustment must be the same form of benefit for each fund.
COLAs and 13th checks offer different benefits for retirees. COLAs are a guaranteed, lifetime benefit increase that can be built upon with future COLAs. COLAs also increase survivor benefits that may be payable after a retiree dies. A 13th check is a one-time additional benefit payment whose amount is determined by years of service. Retirees with a greater number of years of service could receive a larger payment from the 13th check than that of a COLA. Conversely, a member with a larger monthly benefit could receive a COLA that, over time, exceeds what they would have otherwise received from a 13th check. In any case, a COLA is a permanent adjustment to the retiree’s monthly benefit amount while a 13th check is a one-time bonus with no guarantee of issuance in the future.
It's important to acknowledge that each retiree’s ideal scenario is unique. Current age, years of service, and benefit amount lead to situations of varying benefits. While the establishment of the SRAs and the guidelines that drive their use cannot fulfill every INPRS retiree’s preferences, it does protect the retirees’ best interests in the long term.
So, what can INPRS retirees do to influence the decisions made regarding their benefits? While the funding mechanism and rules regarding the SRAs are clear, the conversation about how the money is used, either by issuing a one-time 13th check or providing a permanent monthly benefit through a COLA, begins with the Indiana General Assembly.
INPRS exists to serve the dynamic needs of its members, retirees, and employers. As fiduciaries, it is our duty to prudently manage the member assets entrusted to our care so we can deliver promised benefits to Indiana’s hardworking public servants. When granted approval by the Indiana General Assembly and with the necessary funding in the SRAs, we will efficiently distribute COLAs and 13th checks to the fullest extent of the law.
This article was originally published in the spring '22 issue of Destination: Retirement.