Round Two: What Happened to My Social Security COLA?

It's that time of year again, when people start asking whether Social Security recipients will receive a Cost of Living Adjustment (COLA).  And it appears that the answer is, once again, "no."  As Donald Marron said on his blog recently:

It looks like 2011 will be another year without a cost-of-living adjustment (COLA) for Social Security recipients. Why? Because consumer prices haven’t yet returned to the peak they reached in the third quarter of 2008, when the 2009 COLA was set.

Provided there is no major increase in the CPI-W in September, Marron is absolutely right. One reason why prices haven't rebounded to their 2008 level is that the 2008 level itself was so high. COLAs are measured by their third-quarter-to-third quarter increase, and, as you might remember, the third quarter in 2008 was when oil prices hit $150 per barrel and gas prices were north of $4 per gallon. The result of this timing was a CPI level that was unusually high, leading to a large 5.8 percent cost-of-living increase for 2009. Prices, especially oil prices, dropped precipitously after the summer of 2008 and they haven't increased to that level since.

Social Security recipients are in better shape now than they could have been. As Marron says, if Social Security benefits simply followed the CPI-W (going up and down in line with overall prices in the economy), they would actually be below 2009 benefit levels right now. But since benefits never are cut, they have stayed flat, meaning that real benefits have actually increased. Normally, COLAs keep real benefits flat. Ironically, deflation leads to a better outcome for seniors' COLAs than inflation does.

The chart below shows how a hypothetical $1,000 benefit in 2005 would increase or decrease based on different COLA rules: the current one that has a zero bound and an alternative one that allows for negative COLAs.

When the no-COLA announcement was made in October 2009 for benefits in 2010, there were many calls for an ad-hoc COLA or a one-time payment to seniors, as the Obama Administration advocated. Luckily, advocates were rebuffed (well, not really--see below). This year seems to be no different; in fact, Rep. Earl Pomeroy (D-ND) beat everyone to the punch by introducing a bill in July that would make a $250 one-time payment in the event of a no-COLA year. In the words of Charles Barkley, "that's a terrible idea."

(It seems that lawmakers were actually able to sneak-in a one-time payment to seniors this year--just under a different guise. Under the health care reform act, Medicare Part D beneficiaries will be receiving a $250 check to help them deal with the "donut hole", or the coverage gap between a beneficiary's maximum deductible under their drug plan and the threshold where catastrophic coverage would kick in. Measures in the health care reform package will gradually close this coverage gap, but to "hold beneficiaries over", the federal government will be sending them $250. "Coincidentally", the Medicare Part D and Social Security cover nearly all of the same people . Even under the guise of health reform, lawmakers just couldn't resist the urge to pander to seniors.)

Politico mentioned the possibility in passing the other day that some lawmakers may support using the credit on the PAYGO scorecard to pay for any sort of COLA measure, though nothing specific has been brought up yet. The $43 billion in "credits" on the PAYGO scorecard are the savings that have been accumulated by bills passed this year; most of the savings come from health care reform. Under the PAYGO law, Congress would technically be able to pass a bill such as the one-time payments using these savings as offsets. (Note that Congress could instead decide to use the PAYGO credit to pay for extending tax cuts  for upper-income earners.) Again, these are all terrible ideas that would reflect poor policymaking and poor fiscal decision making.

But some of these ideas are even worse than others:

• The worst outcome would be an ad-hoc COLA, since such an action would institute a permanent change in the Social Security system by making benefits higher (indefinitely) than they would have been.
• Also very bad would be a one-time payment to seniors that was designated as "emergency spending"--thus waiving the requirement that it be paid for. This would at least be only tempory, but it would add to the debt and set a bad precedent.
• Nearly as bad would be a one-time payment that used credits on the PAYGO scorecard -- that would at least eliminate the ability of lawmakers to use those hard-earned credits for something else.
• Though a one-time payment to beneficiaries that was fully offset would do the least fiscal damange, it is poor policy nonetheless. Such a payment is unjustified given that real benefits will aleady be higher than in 2009. And it will take away a policy change which could have been potentially used for deficit reduction.

Getting the message? Any way you frame it, it's just a bad idea. If prices do not drastically increase this month, any type of COLA or one-time payment to seniors in 2011 would be plain old political pandering.

Many of the credits on the PAYGO scorecard (in fact, over $44 billion) were put there by health reform's savings from Medicare Advantage and cuts to Medicare providers over the coming decade. (Note: these numbers should not be confused with the $143 billion in deficit reduction over ten years.) Those deficit savings were hard-earned, and the public was promised that health reform would reduce the deficit. Policymakers must not use those credits to pay for other initiatives. 

Not making the deficit any worse is the first step--but we need to start lowering them.  Lawmakers must resist the temptation to enact an ad-hoc COLA.