The Center for Retirement Research reports that
Between 2010 and 2013, 17 states (with a total of 30 plans) enacted legislation that reduced, suspended, or eliminated COLAs for current workers and often for current retirees.
Of those 17 states, 12 of the cost-of-living adjustment changes have been challenged in court. In nine of those states, the courts have ruled, and “in all but one case have upheld the cut.”
That one outlier case is Washington’s. In 2011, the Thurston County Superior Court did not uphold the COLA cut, on the grounds that it was an illegal impairment of contract. The state Supreme Court heard arguments on appeal in October (more here) — we still await its decision.
In the eight states in which courts have upheld COLA cuts, it was usually found that a COLA is not a contractual right: “The courts clearly view COLAs very differently than core benefits.” This has been useful in other states because
Cutting COLAs is an extremely attractive option to plan sponsors, because it is virtually the only way to make large reductions in a plan’s unfunded liability. Reducing benefits for new hires or even future benefits for current employees – if legally possible – lowers future pension costs but has no effect on the existing liability.