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like California’s Proposition 13 that hobble the revenue base well below <br />the inflation rate, one approach is what some California pension systems <br />have adopted: the Supplemental Targeted Adjustment for Retirees, <br />acronymized as the “STAR COLA.” Pension adjustments are capped at a <br />fixed annual level, and future “make-up” payments — STAR COLAs — are <br />provided if inflation subsides. In 2023, this means that these retirees will <br />not receive an increase of more than 2 or 3 percent, depending on labor <br />agreements, with the remainder of any CPI adjustment payable in future <br />years if and when the inflation rate is lower than the STAR COLA’s <br />predetermined hurdle rate. <br /> <br />Besides employers’ revenue constraints, part of the rationale for STAR <br />COLAs is that retirees face lower inflation pain than active employees, <br />having presumably stabilized their housing costs, so they are better able <br />to accept a delay in COLA payments as long as they can eventually catch <br />up. This arrangement also helps the pension actuaries make realistic <br />forecasts of future pension cost inflation (now about 2.6 percent <br />nationally) because the cap is there, and they can model in the <br />accumulation of “STAR reserve” payments that will eventually work their <br />way into the retiree liability calculation. <br /> <br />Although this formulation may seem odd to policymakers in other states, <br />it’s actually a fairly sensible solution to a complex problem that ought to <br />be considered for pensions elsewhere — and perhaps also for salary <br />adjustments where the employer’s revenues are constrained or volatile. <br /> <br />Outlook: My crystal ball still sees inflation rates in 2023 registering <br />above 4 or even 5 percent early in the year and above 3 percent for most <br />of the rest, but nothing like the 8 to 9 percent year-over-year CPI <br />increases we have seen lately. The most likely path of “sticky <br />disinflation” will be a gradual downward stair step pattern of <br />successively lower CPI reports as the Fed tries to thread the needle to <br />bring the economy to a soft landing without delivering a hard recession. <br />Having a game plan for both possible outcomes is a really smart strategy.