Stagnant Consumer Prices Prevent Social Security Benefit Increases

By Amy Goldstein and Neil Irwin
Washington Post Staff Writers
Thursday, October 15, 2009; 11:47 AM

For the first time in more than three decades, people who rely on Social Security and federal pensions will not get an increase in their monthly benefit checks because consumer prices have stagnated lately in the weak economy, the government announced Thursday.

The twin statements, by the Labor Department and the Social Security Administration, came less than a day after President Obama and Democratic leaders in Congress tried to salve the impact on older and disabled Americans by saying the government should provide $250 payments to 57 million people who depend on Social Security, pensions, or disabled veterans benefits.

The president endorsed a second round of emergency payments, following a $250 payment to older and disabled Americans that was included in the economic stimulus package Congress enacted in February. The proposal, which the White House says would cost $13 billion, comes as the administration gropes for ways to sustain an apparent economic rebound without a massive spending package that critics could label a second stimulus act.

The administration is already developing plans to direct billions of dollars in federal money to small businesses through community banks, government sources said Wednesday. That probably would include funds originally targeted to help bail out massive corporations. Obama aides also are attempting to extend programs to make loans from the Small Business Administration cheaper and easier to obtain.

In recent weeks, the White House has examined a wide range of proposals to funnel money to constituencies seen as suffering. Administration officials have been supportive of extending unemployment insurance benefits that were to expire at the end of the year and are contemplating an extension of an $8,000 tax credit for first-time home buyers that is due to expire Nov. 30.

An increase in Social Security and federal pension checks each January has been a yearly ritual since the mid-1970s, when the government moved to ensure that its subsidies to retirees, pension recipients and others who receive Social Security benefits kept pace with inflation. Thursday's announcement by the Labor Department marks the first time that the federal formula used since then, which is tied to the Consumer Price Index, translates into no increase at all. It is a sharp reversal from the previous year, when Social Security checks grew by 5.8 percent, the largest increase in more than a quarter-century.

"This will be the first year without an automatic Cost-of-Living Adjustment since they went into effect in 1975," said a statement issued by the Social Security Administration. Officials noted that the lack of an adjustment has ripple effects, including no change for the coming year in the maximum amount of workers' earnings that are subject to Social Security payroll taxes.

"Social Security is doing its job helping Americans maintain their standards of living," Michael J. Astrue, commissioner of Social Security, said in the statement. He, too, urged Congress to provide $250 individual payments "in light of the human need."

The cost of living adjustment for Social Security and federal pensions is set every year based on the percentage change in the consumer price index during the July-to-September quarter, compared with the previous year. The Labor Department said Thursday that during the year that ended in September, consumer prices fell 1.3 percent, reflecting a steep decline for fuel and many types of food that occurred at the end of 2008 and early 2009, amid a deep global recession. Even when food and energy are excluded, the consumer price index rose only 1.5 percent over that span. The Federal Reserve aims to keep inflation in the 1.5 percent to 2 percent range.

The Labor Department said consumer prices rose 0.2 percent in September over August levels, continuing a pattern of modest increases that has been in place all year. The increase was driven by a 1 percent rise in gasoline prices. When food and energy prices are excluded, the consumer price index was up only 0.1 percent.

Even as energy prices have risen somewhat in recent months, prices for a wide range of other goods have stagnated. With the economy still weak, few companies feel comfortable raising their prices, expecting that they will lose sales to competitors if they do. Indeed, deep discounting has been more common in many stores. And with the U.S. economy producing well below its potential -- the unemployment rate is 9.8 percent, and factories are operating far below capacity -- many economists think it unlikely there will be a burst of inflation anytime soon.

The unprecedented lack of a cost-of-living increase was first hinted at last spring in congressional budget estimates and an annual report by the trustees who oversee Social Security and Medicare, the government's main financial props for the elderly and disabled. Since then, some senior citizens have complained to government offices and seniors advocates, and federal officials are anticipating a fresh and more vociferous outpouring of complaints now that the announcement becomes official.

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