Understanding What Happened to My Social Security COLA

AARP Public Policy Institute recently held an event on the impact of a period without a cost-of-living adjustment on Social Security beneficiaries and budgets. For the first time since the Social Security Administration adopted automatic COLAs in 1975, there will be no COLA in 2010, with projections of no or very low COLAs through 2012.

This has–not surprisingly, given the power of the senior lobby–prompted outcries that no COLA would be unfair. But a zero COLA merely reflects the lack of inflation in the economy; if anything, seniors have recently benefited from overly generous increases.

COLAs are given to beneficiaries to ensure that Social Security benefits keep pace with inflation. Senior citizens often live on fixed incomes that do not change in response to higher or lower inflation, so COLAs have been instrumental in providing financial support to them to ensure that price changes do not erode the purchasing power of Social Security payments. In 2007, Social Security payments kept around 35 percent of senior citizens out of poverty.

COLA computations rely on price measurements from the CPI-W (Consumer Price Index for Urban Wage Earners and Clerical Workers) and compare third quarter price data to that of the previous year's third quarter. Since Q3 2008 when the last CPI-W measurements were made for the 2009 COLA, prices have declined by an average of 2.7 percent.

The absence of a COLA in 2010 will have direct financial consequences for beneficiaries. However, by keeping Social Security payments in 2010 constant, beneficiaries will actually still be receiving an increase in real benefits, accounting for deflation.

Not having a COLA in 2010 has recently become such a contentious issue, in part, because Medicare Part B premiums that seniors must pay can rise by a larger amount than Social Security benefits. A “hold harmless” provision was adopted to ensure that increases in Medicare premiums do not exceed Social Security benefit increases for 75 percent of Social Security beneficiaries. Were it not for that provision, an automatic 2.7 percent decrease in benefits would apply. (The beneficiaries in the additional 25 percent could see increases in Medicare Part B premiums that are not offset by a COLA in the next few years. However, Medicaid pays the monthly Part B premiums for low-income individuals, who comprise 68 percent of beneficiaries not covered by the hold harmless rule).

The last COLA, adopted in December 2008, was 5.8 percent, the highest in over 25 years. To qualify for a new automatic COLA, average prices must be higher than when the last COLA was enacted. Since the last COLA was abnormally high and prices have since dropped significantly, both the Social Security Administration (SSA) and CBO project that prices will remain below those calculated in Q3 2008 until some time in 2011.

OASDI COLA

With prices below Q3 2008 levels, simply maintaining current Social Security benefits at current levels would actually reflect an increase in Social Security benefits in real terms.

Yet, there are five bills in the House currently proposing some sort of ad-hoc COLA (H.R. 3557, H.R. 3572), a flat one-time payment (H.R. 3597, H.R. 3536), or a limit on Medicare Part B increases for those not held harmless (H.R. 3200).

It would be fiscally irresponsible for Congress to enact an ad-hoc COLA above what is appropriate due to inflation. Certainly, there will be immense political pressure to do so, but COLAs have a particular purpose – to reflect inflationary conditions – and there is no economic justification for caving to powerful interest groups by expanding benefits for political gain.

If the economy appears to be in such bad shape that further stimulus measure are necessary, temporary, one-time payment to seniors could be appropriate for stimulative purpose, but that is very different than permanent changes to the Social Security program, which is already dangerously underfunded.

With a fragile economy and deteriorating fiscal health, implementing a COLA for seniors would simply be the government spending money that it doesn't have and where it doesn't need to.