The Social Security Windfall

As you have probably heard, Social Security recipients won’t be getting a cost-of-living adjustment (COLA) in 2010. Well, at least under current law.

The reason is simple: The annual COLA is based on a measure of consumer inflation from the third quarter of one year to the next. Last year, that measure was boosted by the run-up in energy prices, and Social Security recipients received a 5.8% increase in their monthly payments. That price shock has receded and, as a result, inflation from the third quarter of 2008 to the third quarter of 2009 was actually negative. According to today’s release of September consumer price data, the CPI-W (the inflation measure used to set the COLA) fell by 2.1% since the third quarter of last year.

If Social Security payments were exactly indexed to inflation, that would imply a negative COLA—a reduction in monthly benefits—of 2.1%. But the law doesn’t allow benefits to fall. So monthly benefits in 2010 will be the same as in 2009.

Some observers are portraying this as a hardship for seniors and are suggesting that they should get a special COLA this year. If you put on your green eyeshade for a moment, however, you will realize that the reverse is true. The fact that Social Security benefits will be flat means that seniors are receiving a windfall. Under the logic of cost of living adjustments, those benefits should have fallen by 2.1%. Instead they will be flat. Seniors will thus receive a 2.1% increase in their real Social Security benefits.

That’s why thoughtful budget analysts from across the political spectrum believe that a special COLA is not warranted. See, for example, this piece by Andrew Biggs at the American Enterprise Institute and this piece by Kathy Ruffing at the Center on Budget and Policy Priorities. (In case you aren’t familiar with them, Andrew and Kathy are two of the most knowledgeable people about Social Security on the planet.)

Kathy’s piece includes a nice discussion of alternative measures of cost-of-living (addressing the question of whether the cost of living for seniors may be rising faster than the CPI-W suggests). She also concludes, rightly in my view, that if policymakers fell compelled to act, it should in the form of lump-sum payments rather than any messing around with the COLA structure. President Obama endorsed that idea yesterday.

In a separate piece, Andrew notes that one group of seniors are getting a bum deal from the absence of a COLA: new retirees. They never received the benefit of the too-large 2009 COLA, but will have to bear the burden of no COLAs during the year or two that it will take for inflation to catch up to its 2008 peak.

Finally, another Andrew who’s an expert on Social Security–Andrew Samwick at Capital Gains and Games–suggests that any lump sum payments to Social Security beneficiaries in 2010 be paid for by reducing their COLAs the next time they are positive. The payments would thus provide some stimulus in 2010, but wouldn’t add to the long-term federal debt.

Comments

[F. Bradeen:]

Let me get this straight. We severely understate inflation. We then tell seniors that they don't deserve a raise. Now thats real justice.

Oct 15 04:46 PM

[VirtualDebt:]

Considering their Generation is the one that started the horrible implementation of social insurance as Pay As You Go, which is subject to population fluctuations and also instead of shaping it as a investment fund, but more along the lines of non-marketable treasuries holding fund, where the Government taxes the population to pay for funding the Government treasury position (general tax crap after all claims have been paid of course), of course pays back receipts back with even more taxing to retire the non-marketable treasuries issued to the SSA Trust Fund to begin with. Of course to make things worse as the government always does it tacks on other pointless programs, like Medicare and medicaid to SSA when the SSA cant pay off its primary function to begin with.

I think its time we wind down SSA as its a big joke, the time I retire i doubt there be a US left, and if it is left there sure the heck wont be SSA that I paid into it lol.

Oct 15 04:57 PM

[LilBob:]

I'm on the side of Kathy Ruffing on this one. A lump sum payment indexed to increases in out of pocket expenses for prescription pharmaceuticals and other health care related services seems like the best way to go.

Oct 15 06:39 PM

[The Geoffster:]

Social security and medicare allow us to warehouse our old folks and hand the bill off to the next generation of suckers.

Oct 15 06:40 PM

[User 151115:]

You cannot control the numbers of people growing older , however you can control the numbers hired to work for the government.

Oct 16 11:02 AM

[Tomos:]

More Washington corruption.

Oct 18 01:24 PM