What is reasonable COLA assumption for lump sum

[Gary]

An ee receives a lump sum. plan provides for a COLA tied to the increase in CPI. What is a reasonable future COLA assumption when determining a lump sum. At this point it seems an employer can exclude the COLA on the groiunds that there is no way to say if the COLA will be positive or negative.

Curious to hear any comments.

One suggestion is to take a long term avg of past annual changes in the CPI.

[david rigby]

I think we just discussed this a few days ago. Try a search.

[Guest Steve C]

We did discuss a related question, but I don't believe we went any further than saying that a "reasonable" assumption should be made.

I'd find it hard to justify a zero COLA assumption. I think the last time the CPI showed a decline was close to 50 years ago (you can find CPI data at http://stats.bls.gov/cpihome.htm).

Are there any caps on the annual adjustment? I work with one plan where the COLA is based on the CPI, capped at 3% per year. A 2.5% increase assumption is specified in the plan document (definition of actuarial equivalence).

[david rigby]

I believe that Steve's example is a demonstration of how to arrive at a "reasonable" assumption. If the plan establishes some maximum (which might be both annual and lifetime), then that is a starting point. I suggest looking at the history of the index (CPI or whatever is referenced in the Plan), probably at least a 10 year history.