The skinny on Social Security benefits

October 14, 2010

On Friday, the Social Security Administration is expected to announce that for the second consecutive year, there will be no Social Security cost-of-living increase. That makes perfect sense, since the cost of living is not rising. But this being an election year, there may be intense political demand for a special bonus to retirees, like the $250 bonus checks issued — regardless of need — to all senior citizens in 2009.

It is imperative that President Barack Obama, and Congress, resist demands for bonus payments to senior citizens. The federal budget — and long-term projections for Social Security — are in bad enough shape as is. If Washington can’t resist handing out bonuses, there is no hope the national red ink ever can be stopped.

There’s no “right” to higher Social Security benefits.
In 1972, Congress created a COLA system to increase Social Security benefits (and the threshold level of Social Security taxation) in sync with the rising cost of living. Each year from 1972 to 2009, Social Security benefits rose, owing to inflation. Seniors became accustomed to the first check in January of any year containing a boost. Some surely believe that law requires their benefits to rise annually.

But there’s no right to higher Social Security benefits — indeed, no “right” to any particular level. Congress may change Social Security benefits and tax formulas at whim. So far changes have meant higher benefits, but they can also mean reductions of benefits. Reduced Social Security benefits, at least for well-off seniors, are inevitable in the future. For now, if there is no inflation, there should be no COLA increase.

But wasn’t there a big benefit increase in 2009?
Recall that in mid-2008, fossil fuel prices briefly spiked, then fell. Timing of the spike interacted with details of the formula used by the Social Security Administration to cause a 5.8 percent benefit increase in 2009, though consumer prices actually rose by less than half that in the previous year.

Now a detail of the same formula, having to do with the third quarter of 2008, will ensure no increase in January 2011. Senior citizen lobbies may demand the formula be changed. Though they didn’t complain when the formula awarded too much in 2009. Considering the 5.8 percent 2009 increase, for the last two years seniors have been slightly overpaid by Social Security, and the slight overpayments will continue.

Why the 2009 bonus checks?
In theory, the $250 bonus checks of 2009, total cost about $14 billion, were for economic stimulus. Obama has been honest about the political background: “We never forget seniors because they vote at very high rates.” Though the 2009 bonus was described by the White House as a “one-time” bonus for 2010, Obama proposed a second $250 bonus, which was not enacted by Congress. Will there be a fresh round of calls for another “one-time” bonus?

But aren’t there senior citizens in need?
Of course! The average Social Security retiree benefit is about $14,000 annually, hardly princely. Many recipients need more. And many recipients need less — as a group, senior-citizens are the best-off sector of American society, with the highest net worth and by far the most government support.

Social Security should be reformed so that those at the bottom receive more while those at the top receive nothing.

This is not how seniors’ lobbies approach the issue. They call on the political fiction that Social Security recipients are only “getting back what they put in.” This is a total fantasy: Social Security is an income transfer program, not a savings instrument, with today’s workers taxed to provide for yesterday’s. The political fictions of Social Security are skewered by Allan Sloan here. Cutting and eventually ending Social Security payments to the affluent will be needed to keep the program from running out of funds.

Isn’t there plenty of money in the Social Security Trust Fund?
That “trust fund” is another fiction — it is no more than a drawer full of IOUs from one government agency to another.

In 2009, the Congressional Budget Office said Social Security outlays would not exceed revenue until 2017; instead this happened in 2010. The CBO further said Social Security would run a roughly $150 billion surplus in the years representing a two-term Barack Obama presidency; instead a $70 billion deficit is now predicted. So surely you feel nice and secure about the Social Security trustees saying their system has plenty of money until 2037.

Don’t seniors deserve extra because of the recession?
A year ago, when the Social Security Administration said there would be no COLA for 2010, President Obama backed a second “one-time” bonus check, saying, “We must act on behalf of those hardest hit by this recession.”

As a group, seniors are the least hardest hit. Most are retired, so unemployment, the biggest economic problem associated with the recession, does not impact them. Many consumer prices have fallen, which increases seniors’ buying power.

Two kinds of prices are rising — college education and health care. The former has no impact on seniors, while the latter has limited impact because seniors don’t pay most of their health care costs. Young workers pay those costs via Medicare taxes.

Of course there are individual seniors in need — but for senior-citizen lobbies to depict seniors overall as hard-hit by the recession is political selfishness in the extreme.

Why you should worry about Social Security.
Here’s the Social Security Administration’s current Social Security fact sheet and below are two spooky facts quoted directly from it:

  • By 2035, there will be almost twice as many older Americans as today — from 40.7 million today to 76.3 million.
  • There are currently 2.9 workers for each Social Security beneficiary. By 2035, there will be 2.1 workers for each beneficiary.

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I found your entry interesting do I’ve added a Trackback to it on my weblog :)…

Posted by World Wide News Flash | Report as abusive

Sanity in an election year!
It will go largely ignored. :^(

Posted by nadie | Report as abusive

Mr. Easterbrook, when you solve the inconvenient little senior problems of the rising food cost and (still) skyrocketing health care cost, please let me know.

Posted by Larry803 | Report as abusive

“As a group, seniors are the least hardest hit. Most are retired, so unemployment, the biggest economic problem associated with the recession, does not impact them.”

Have you heard of the stock market? Seniors, retired or on the cusp, with savings impacted by the stock market, are definitely feeling a lot of pain and unlike career workers they have few options for reemployment to restore their lost savings.

Posted by JohnScottTynes | Report as abusive

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Here at World Spinner we are debating the same thing……

Posted by World Spinner | Report as abusive

with the baby boomers generation in large numbers all boils down to numbers now, what is the impact on costs, what’s it going to cost the nation?, is 14 billion a small amount considering not all citizens benefit, what’s going to be the impact on inflation, since the USD is an external currency traded outside the US, i do not see too much of a concern, obviously, if a professional economist has a different take on this, let me know, I particularly like the phrase Gregg uses here, ‘today’s workers taxed to provide for yesterday’s’,

Posted by arvindleop | Report as abusive