Posted on 01 October 2009
By Mark Miller
Anger over the disappearing Social Security cost-of-living adjustment (COLA) is just a preview of the nasty battle looming over broader Social Security reform.
Social Security is running out money faster than expected due to the recession and the soaring number of early retirement benefit claims. The Congressional Budget Office says the program will start operating at a deficit next year; earlier projections had Social Security running in the red somewhere around 2016. There’s still plenty of money in the Social Security trust fund to pay benefits, but the accelerating problems underscore the need for reforms to get the program back on track for the long haul.
Washington will turn to Social Security reform sometime after health care wraps up. The debate has the potential to become Round Two of the nasty public displays we saw at last summer’s health care town hall meetings. That’s because Social Security reforms inevitably must involve some combination of trimmed benefits and higher taxes. The changes probably would be phased in over time with plenty of grandfathering. And, what we need here is a balanced, reasoned discussion about how to balance the real needs of today’s seniors with the tax and deficit burdens being placed on younger people. Far more likely, I’m afraid, is an ugly round of inter-generational demagoguery.
Here’s the short-term issue with COLAs. For months, it’s been clear that there won’t be a COLA in 2010. But with the news sinking in, anger is growing, as comments posted on my July COLA story indicate.
The automatic COLA–in place since 1975–is determined by averaging inflation rates in the third quarter of every year; the formal measure is the U.S. Bureau of Labor Statistics’ Price Index for Urban Wage Earners and Clerical Workers (CPI-W). The CPI-W is a broad measure of inflation, based on a survey of consumer prices paid by a big chunk of the U.S. population.
But retirees are impacted disproportionately by a sub-set of prices that tend to rise more quickly than inflation in the broader economy-health care, energy and transportation. Any comparison of prices in these areas and Social Security COLAs shows that retiree buying power has eroded sharply.
Congress is scrambling to respond to the fury being expressed by seniors. One possibility is a one-time cash payment to keep beneficiaries whole. Another proposal addresses the problem by eliminating any Medicare Part B premium increases. Since premiums are usually deducted from Social Security checks, some beneficiaries could see smaller checks if premiums rise. The majority of beneficiaries are protected from reductions by a hold-harmless provision prohibiting premium increases that reduce Social Security payments. Several categories of Medicare recipients aren’t protected under the hold-harmless provision, including high-income people, new enrollees and low-income individuals eligible for Medicaid (in these situations, Medicaid pays the Part B premium). Most Part D prescription drug plan participants also aren’t protected under the “hold harmless” provision.
AARP’s Public Policy Institute sponsored an in-depth forum recently featuring experts on the history of Social Security COLAs, the interplay of Social Security and Medicare, and how the absence of a COLA would impact the states. It’s not short, but if you want to bone up on the issue, it’s worth watching.