No Social Security COLA is no biggie

By Chuck Blahous
Special to The Washington Post
August 28, 09

"Millions of people face shrinking Social Security checks next year," The Washington Post reported Monday, "as officials project that benefits will stay flat for the first time in a generation."

The New York Times reported earlier this year that the lack of a Social Security cost-of-living adjustment (COLA) in 2010 "will be a shock to older Americans" and quoted an AARP official lamenting that "most seniors have never been through a year in which there was no Social Security COLA."

But this controversy is more smoke than fire.

Like other Americans, seniors are suffering through the economic downturn. Unlike other Americans, however, most seniors are benefiting from multiple technical quirks of law that protect their income stream.

First, there is the current Social Security COLA. Automatic COLA increases were established in 1975 in an effort to protect seniors' purchasing power. In January, Social Security began paying its largest COLA since 1982, 5.8 percent. But this adjustment has since surpassed national measures of the cost of living.

The 5.8 percent boost was based on the high price increases of last year, especially in food and fuel. Since then, prices have subsided. According to the Congressional Budget Office, the Consumer Price Index subsequently declined by 4 percent. By law, COLAs can never be negative. So benefit payments are exceeding inflation, and seniors will simply pocket this 4 percent increase in real purchasing power for the indefinite future, until prices once again exceed their 2008 levels and further COLAs resume.

Meanwhile, most seniors stand to benefit from a provision in the Medicare Part B premium formula. Under normal circumstances, the Part B premium is indexed so that one-fourth of program cost increases are passed on to beneficiaries, three-fourths to taxpayers. Part B also has an "income-relating" feature, which requires higher-income seniors to pay more for their benefits.

A "hold harmless" provision, however, ensures that for most beneficiaries (those not subject to income-relating), the dollar amount of their Social Security check (minus the Part B premiums) will not diminish from one year to the next. In a year without a COLA, therefore, the majority of seniors will receive Medicare Part B coverage of increased value, with the larger bill passed on entirely to others.
Third, the February stimulus legislation provided $250 checks to most Social Security recipients. Though some working seniors will need to return these checks because of their interaction with the "Making Work Pay" tax credit, non-working seniors will keep them.

Taken together, these features of law mean that taxpayers are providing substantial additional income protections for most seniors, well beyond inflation.

If our policies for seniors existed in an ideal world, benefits would be adjusted upward when prices go up and downward when prices go down. The intended burden-sharing of Medicare Part B premiums would not shift with price swings in the general economy. Alternatively, AARP, the nation's most powerful organization for the elderly, would responsibly explain to its members that the deviations from these ideals are largely working in their favor.

But this isn't an ideal world. Accordingly, Congress is being pressured to "do something" about the COLA issue, which would translate into further costs facing taxpayers and increased payments to the seniors benefiting from these technical quirks.

The Obama administration entered office talking about tough choices and fiscal responsibility. These issues shouldn't be particularly tough. Helping Congress defuse this unnecessary political problem would be a modest threshold test of such responsibility.

Chuck Blahous, a senior fellow at the Hudson Institute, served as deputy director of the National Economic Council from 2007 to 2009 and executive director of the President's Social Security Commission in 2001.

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