Divorce Agreements: Where Have All the COLA’s Gone? Part 1
Wednesday, March 20, 2013
Until the mid-1980’s cost of living adjustments (COLA) provisions were a staple ofMassachusetts alimony and child support settlements. People agreed on a beginning sum or sums for periodic support; they hoped to stay out of court for future modification actions; and COLA’s were a tool to encourage that result. It was clear that the Court could not impose a COLA, but the parties did so quite commonly, by agreement.
Most COLA’s provided that one or another Consumer Price Index (CPI) of the U.S. Department of Labor would be reviewed every year for increases over the prior year, or cumulatively, over a “base year”. Generally, if the payor’s earnings’ increase kept pace with or exceeded corresponding increases in the CPI, support would be raised by the percentage increase in the CPI. Otherwise, support would usually increase by that percentage, if any, by which the obligor’s pay increased over the same period.
For few unlucky support payers, the COLA did not compare his (it almost always was “his”) income to the CPI, and he became a guarantor of inflation, simply passing along a percentage increase equal to that in the CPI. Some of these payors became the horrified victims of the rampant inflation of the late 70’s and early 80’s (remember “stagflation”?). Forgetting to pass along mandatory COLA’s, or otherwise with head firmly planted in sand, led to staggering arrearages (read many tens of $1,000’s of dollars at times), and resulting contempt judgments.
Then, COLA’s died.
Ever since, support recipients with deals for flat sum payments have, for the most part, absorbed the risks of inflation on their cash flow, knowing that their only recourse is a new lawsuit, called a modification action, the cost of which would almost certainly outrun and financial gains attained. Yet, despite the flattening of inflation (about 2-2.5% per year since the 90’s), it is hardly non-existent for people with bills to pay. Consider that inflation at “only” 2.5% per year over 10 years works a 25% reduction in purchasing power, and the challenge is evident.
With the issue arising recently in recent divorce mediations at our firm, we ask the question: is it time to reconsider COLA’s?
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