Social Security Expects No COLAs for 2 Years

Associated Press
Monday, August 24, 2009

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

The trustees who oversee Social Security are forecasting that there will be no cost-of-living adjustment for the next two years. That has not happened since automatic increases were adopted in 1975.

By law, Social Security benefits cannot decrease. Nevertheless, monthly payments would drop for millions of people in the Medicare prescription drug program because the premiums, which often are deducted from Social Security payments, are scheduled to rise slightly.

"I will promise you, they count on that COLA," said Barbara B. Kennelly, a former Democratic congresswoman from Connecticut who heads the National Committee to Preserve Social Security and Medicare. "To some people, it might not be a big deal. But to seniors, especially with their health-care costs, it is a big deal."

Cost-of-living adjustments are pegged to inflation, which has been negative this year, largely because energy prices are below 2008 levels.

Advocates say seniors still face higher prices because they spend a disproportionate amount of their income on health care, whose cost is rising faster than inflation. Many also have suffered from declining home values and shrinking stock portfolios as they look to those assets for income.

"For many elderly, they don't feel that inflation is low because their expenses are still going up," said David Certner, director of legislative policy for AARP. "Anyone who has savings and investments has seen some serious losses." About 50 million retired and disabled Americans receive Social Security benefits. The average monthly benefit for retirees is $1,153 this year. All beneficiaries received a 5.8 percent increase in January, the largest since 1982.

More than 32 million people are in the Medicare prescription drug program. Average monthly premiums are set to go from $28 this year to $30 next year, though they vary by plan. About 6 million people in the program have premiums deducted from their Social Security payments, according to the Social Security Administration.

Millions of people with Medicare Part B coverage for doctor visits also have their premiums deducted from Social Security payments. Part B premiums are expected to rise as well. Under the law, however, the increase cannot be larger than the increase in Social Security benefits for most recipients.

There is no such provision for drug premiums.

Kennelly's group wants Congress to increase Social Security benefits next year, even though the formula does not call for it. She would like to see either a 1 percent increase in monthly payments or a one-time payment of $150.

The cost of a one-time payment, a little less than $8 billion, could be covered by increasing the amount of income subjected to Social Security taxes, Kennelly said. Workers pay Social Security taxes on the first $106,800 of income, a limit that rises each year with the average national wage.

But the limit only increases if monthly benefits increase.

Critics say that Social Security recipients should not get an increase when inflation is negative. They note the big increase in January -- after energy prices had started to fall. They also note that Social Security recipients received one-time $250 payments in the spring as part of the government's economic stimulus package.

"Seniors may perceive that they are being hurt because there is no COLA, but they are in fact not getting hurt," said Andrew G. Biggs, a resident scholar at the American Enterprise Institute, a Washington think tank. "Congress has to be able to tell people they are not getting everything they want."

Social Security is also facing long-term financial problems. In 2016, the retirement program is projected to start paying out more money than it collects. Without changes, the retirement fund will be depleted in 2037, according to the Social Security trustees' annual report.

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