Cuts on the sly

From Free exchange
January 2, 2013 - 2:56pm

TO THOSE on fixed incomes, including many retirees, inflation is the enemy. Workers can generally expect their wages to rise with inflation (if not in one-for-one lockstep). But after retirement income is set, and erodes in real terms as prices increase. Some retirees are protected; their pension benefits increase with inflation each year. That protection may now be vulnerable. A smaller cost-of-living increase is a sneaky, and sometimes only barely legal, way to cut benefits when a pension is under-funded.Indexing benefits to inflation is expensive, but it’s not always appreciated. The value of inflation indexation is less apparent early in retirement, particularly when inflation is dormant, as has been the case since the mid-1980s. That may help explain a new enthusiasm for fiddling with indexation as a means to address funding shortfalls in a financially-strapped post-crisis wo...


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