What Are the Pros and Cons of Including Cost-of-Living Adjustments in Present Value Reports?

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Those who argue against COLA point out that a present value based on COLA may leave their clients with a bad taste in their mouths because the triggering event, such as a 3 percent increase in the consumer price index, may not come to pass each year. They add that the burden of providing COLA will force many plans to cut back. Furthermore, because COLA increases occur in the future, they are clearly nonmarital in nature. Even more savvy opponents point out that because COLA annuities are not common in the annuity marketplace, there is no common methodology even to calculate them. Why compound their wildly speculative nature with the uncertainty of its calculation? Advocates of COLA counter that, considering the endemic nature of inflation in our society, choosing a 0 percent COLA factor is far more speculative than using a modest estimate of future COLAs. How equitable is a pension division that overlooks the likelihood that the value will double in the next 20 years? Arguing that ... more
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