Officials with the South Dakota Retirement System expect next year’s cost-of-living adjustment for retirees to fall below inflation — again.

The system’s board members heard the projection at a Wednesday meeting in Pierre. They were also told that the adjustment has fallen short of inflation each of the last five years.

Executive Director Travis Almond urged board members to reconsider what the system’s cost-of-living adjustment (COLA) goal should be. Almond said people assume the adjustment is supposed to match inflation.

Public retirees in South Dakota face potential sixth year of less-than-inflation benefit changes

Most state and local public employees, including teachers and state workers, contribute 6% of their pay to the retirement system with a 6% employer match, although some classes of employees contribute more. There are more than 105,000 members in the system.

“We operate on the lowest pension spending in the nation, and in my view I think that makes matching inflation in all periods virtually impossible — if not flat out impossible,” Almond said.

Compared to the rest of the country, South Dakota spends the least amount of government funds as a percentage of its overall spending on its pension plan, according to South Dakota Retirement System officials. The state does that while remaining 100% funded as required by state law, which means the system is on schedule to pay future benefits at the current COLA level.

2027 adjustment predicted at 2%

Doug Fiddler, the system’s senior actuary, told board members he expects a 2% cost-of-living adjustment beginning in 2027, based on projected investment returns in fiscal year 2026.

Inflation spiked to 4.2%, a three-year high, in May

The adjustment is designed to match inflation, up to a cap of 3.5%, but can fall short if the system’s investments don’t meet their long-term return assumption of 6.5%.

Inflation has increased by 2.92% since the Bureau of Labor Statistics last measured it in 2025. If that trend continues, Fiddler said inflation could reach 4.4% later this year.

“We have 2.5 weeks left to go in the fiscal year, with pretty volatile investment results day-to-day,” Fiddler said.

The retirement system is on track to finish the year with about 11% in investment returns. The cost-of-living adjustment is also dependent on member demographics, salary trends, retirements, disabilities and mortality. 

The South Dakota Retirement System fund has underperformed its investment return benchmark in seven of the last 10 years. That’s in part due to the “contrarian” approach the South Dakota Investment Council takes toward state investments — pulling back risk when markets are high and buying when stocks are cheaper. Investment Council Director Matt Clark told South Dakota Searchlight earlier this year that the state’s stock investments were set to the “minimum risk position.”

The council has recently begun taking on more risk, said Danielle Mourer, senior portfolio manager.

Fiddler said he “gets a little bit worried” about adjustment amounts within the next five years. There’s about a 30% chance the system will not issue an annual cost-of-living adjustment in 2031 and will “have to make changes” to its retirement benefits process.

“We’re tied to fixed contributions that are essentially the lowest in the nation trying to fund a pension plan,” Fiddler said. “So, we’re going to have to have something that adjusts and a fair chance that we will have to make changes.”

System evaluates adjustment goals, gaps for some retirees

Fiddler presented a chart showing South Dakota’s average annual cost-of-living adjustment outpaced neighboring states, though all fell below inflation.

Compared to plans in states such as California, Missouri and Illinois, South Dakota had lower average adjustments but also lower contribution rates and less pension debt.

Matching the annual cost-of-living adjustment to inflation is “aspirational,” Fiddler said. A 1% cost-of-living adjustment amounts to about $92 million.

“Nobody is able to match inflation with their COLAs around the country,” Fiddler said.

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Not all retirees are equally affected. Benefits for South Dakota workers who retired between 2016 and 2022 are behind inflation. Benefits for retirees from the 1990s have outpaced inflation. The contrast is due in part to high inflation from 2022 through 2024 that outperformed investments at the time. 

“The COLA outcome should be equitable,” Almond said. “That means that we’re ensuring they do not unintentionally favor one generation of retirees over another at the end of the day.”

Board members discussed changing the system’s stated goal for the annual adjustment. Board member and state Secretary of Human Resources and Administration Darin Seeley suggested reframing it as “affordable inflation protection.”

“You don’t set an expectation that we’re going to make it,” Seeley said. “We’re going to do what we can, but we’re not going to meet the COLA, and it shouldn’t be the expectation that we meet the COLA.”

System officials plan to bring proposed changes to the board’s next meeting.