In light of proposals being discussed to increase seniors' Social Security cost-of-living adjustment (COLA), the Republican Conference has prepared an analysis regarding the issue.
Background: The Social Security Administration calculates the annual beneficiary COLA based on year-over-year increases in the consumer price index (CPI). If consumer prices fall, Social Security beneficiaries would not receive a COLA increase-nor would they be penalized with a decrease. According to the Congressional Research Service, seniors have received COLA increases every year since 1975; the COLA beneficiaries received beginning in January 2009 was the highest since 1982, when inflation was slowly declining after years of double-digit increases. Bipartisan Congressional efforts established the COLA formula beginning in 1975 to offset the effects of inflation-which serves as a tax on thrift and savings. Conversely, lower prices mean the same level of benefits will go farther and purchase more goods during difficult economic times.
Current Situation: While the 2010 COLA will not be formally calculated until October based on third quarter CPI data, the Congressional Budget Office and other experts are projecting a zero COLA for 2010, and potentially for future years as well. Beneficiaries received a 5.8 percent benefit increase in 2009, largely due to the significant run-up in energy prices during 2008. By contrast, lower energy prices and a fall in consumer prices generally due to the current recession could result in a mild period of deflation with respect to the COLA formula, such that it may take several years for prices to exceed 2008 levels.
Former Social Security Administration official Andrew Biggs estimates that seniors received an above-inflation increase of $516 in 2009, based largely on the timing of the COLA formula; third quarter data reflected high energy prices, but not the subsequent fall in both energy and consumer prices after the economic events of last fall. In fact, the Wall Street Journal notes that consumer prices have fallen by 2.3 percent over the last nine months-meaning that current Social Security benefit payments are worth relatively more in terms of buying power than earlier this year without an additional COLA increase.
Deficit Implications: Various proposals have been discussed to prevent seniors from "losing out" on a COLA adjustment-even though, as noted above, Social Security benefit checks buy more than they did at the beginning of the year irrespective of an additional increase. The proposals could take the form of a one-time payment to seniors, similar to that included in the "stimulus" bill, or an adjustment overriding the COLA formula to give seniors yet another benefit increase.
The costs of providing such an "adjustment" could be significant, as providing a $250 one-time benefit to seniors in the "stimulus" bill using general revenues cost $13.1 billion. Such payments would place further burdens on the Social Security trust funds-which face a cumulative deficit of $5.3 trillion-and add to a federal deficit that already exceeds $1.6 trillion. Moreover, the COLA formula effects other government calculations, including those for Supplemental Security Income benefits, railroad retirement benefits, and veterans' pensions. Depending on its structure, a COLA adjustment could significantly increase federal spending over and above that for Social Security retirees.
Conclusion: Despite various claims to the contrary, Social Security beneficiaries have enjoyed a real-terms increase in the purchasing power of their benefit checks-and will continue to do so even in the absence of a COLA adjustment. While Democrats may intend to assuage seniors' concerns regarding their government takeover of health care by overriding the Social Security COLA formula, some Members may be skeptical about spending billions to provide an expensive additional "benefit" that adds to existing deficits.