Divorce Agreements: Where Have All the COLA’s Gone? Part 2 Seven Reasons Why COLA’s May Help
Wednesday, March 27, 2013
In our last entry, we recalled the days when cost of living adjustments (COLA) provisions were a common feature of Massachusetts alimony and child support settlements; and then their virtual disappearance. Our recent experience in divorce mediation suggested to us that perhaps it is time to revisit this powerful but potentially risky economic device in settlements, known in Massachusetts as separation agreements.
Here we will focus on 7 reasons why COLA’s may be beneficial to divorcing parties:
- Inflation is real. Even though we emerged from a decade of high, sometimes double digit, annual increases in the cost of living, into two decades of low inflation environment, 2.0 – 2.5 percent inflation still takes a toll on a stagnant sum, be it a wage or a support payment. Ten years takes 20 to 25 cents off of every dollar received just by the passage of time. A COLA can reduce or eliminate this automatic support benefit cut to the recipient.
- Inflation may get really real. Just because inflation is low now does not mean that it will always be this way. Finding an economist in 1980 who would predict the relatively tame experience of the 90’s and this century so far would not have been easy. Now, some of them are urging us to expect renewed inflation pressure as the U.S. economy recovers and integrates the long-term experience of stimulus. If they are right, purchasing power for support recipients
will erode more quickly.
- Payor exposure may exceed the cost of living. The payor who has experienced financial fortune in the form of income increases beyond the cost of living after divorce may risk support increases by exercise the Court’s modification powers that exceed inflation. For the reasons below, a COLA will reduce incentives of a support recipient to “roll the dice” by bringing a new law suit to increase support, especially in a high inflation environment, where he/she expects and experiences increasing support without new costs or risks.
- Support modifications are expensive. Some alimony and child support settlements are defined by ongoing percentages of the payor’s income, such as “The Husband shall pay 33% of his gross income, as defined, as alimony to the Wife…” These arrangements have the advantage of being self-modifying and do not require any investment in court proceedings, or private dispute resolution (mediation or arbitration), if properly drafted and followed. But, most cases settle with a flat sum for support, as in “The Husband shall pay $2500.00 per month as child support to the Wife…”, leaving the only means of modification negotiation or a court case for modification. The high cost of every court case is a powerful disincentive to a support recipient who seeking an increased support when the “only” known substantial change is inflation. Of course, court cases are expensive for payors, too.
- Support modification cases are time-consuming. All court cases take time. In the Massachusetts court system, a modification case is supposed to take no more than 8 months, according to rule; but that rule is often observed by its breach. While a modification by mediation or arbitration, is shorter and less expensive generally, they still suggest the need for counsel, financial statement preparation, information exchanges and time for deliberation and negotiations.
- Support modification cases are emotional. Many people emerge from divorce settlements, whether achieved by lawyer negotiation, mediation or litigation, emotionally drained and exhausted. Resuming confrontation of any level of intensity can be de-stabilizing and at best, unpleasant. The senses of being under attack and being victimized can resume with a vengeance, reducing productivity and undermining shared parenting.
- Support modification cases are uncertain. When one makes the decision to sue for modification, he/she does not know most of the attendant facts that may come into play, because the other party’s life may be largely opaque. Once an action is brought, it begs a counter-suit, which may be based in pay reductions, health concerns and perceptions, demands for income attribution (as in, “two years have passed and she hasn’t even looked for work”), and the like. In support modification cases, the Court is compelled to re-compute the Child Support Guidelines and hear all other relevant factors. The final result may be no increase, a minor one or even a decrease in the support sum.
COLA’s cannot prevent all modification cases. But, they can neutralize one powerful and incessant change in our economy, impacting the cost-benefit analysis that either side must make before beginning any action to modify.
In our next entry, we will explore the risks of COLA’s.