Why Social Security COLA cuts will whip up a fight
If you want to tick off a senior, just mention Social Security’s cost-of-living adjustment (COLA). The COLA has been on auto-pilot since 1975, when the first automatically-adjusted benefit adjustment was made, using a formula tied to the Consumer Price Index. A COLA was awarded every year from that time until 2008, but since then — nada.
Uncle Sam’s stinginess resulted from a quirky spike in the CPI-W — the index now used to determine the COLA — in the third quarter of 2008. Just before the economy crashed, the CPI-W spiked temporarily due to a big increase in energy prices. The result was a whopping 5.8 percent COLA for 2009. Social Security payments can’t rise until the CPI-W exceeds the 2008 level — and they can’t fall under federal law — so benefits were held level in 2010 and 2011.
A 1.1 percent COLA is forecast for 2012 by the Congressional Budget Office (CBO). But debate is heating up in Washington about further changes that could enrage seniors anew.
Several of the key federal deficit reduction plans that have been advanced in Washington recommend shifting to a measure of inflation called the “chained CPI.” A chained index reflects changes that consumers make in their purchasing across dissimilar items in response to price changes; the theory is that a spike in gasoline prices will prompt consumers to spend less on fuel, perhaps more on food. And so on.
The chained CPI could be applied to federal benefit programs and to the income tax code — although it stands to generate far more benefit cuts than revenue gains.
On the benefit side, a chained CPI would impact Social Security, civilian and military pensions and veterans’ benefits and Supplemental Security Income. On the revenue side, a chained CPI might be applied to inflation adjustments for tax brackets in the personal income tax code, effectively serving as a stealth tax hike by reducing tax bracket adjustments and subjecting more of individuals’ earnings to higher tax rates over time.
According to the CBO, benefit adjustments could yield $217 billion over 10 years, with 52 percent of that — $112 billion — coming from reduced Social Security COLAs; income tax bracket creep would generate $72 billion.
Most proposals to cut Social Security benefits push the changes far down the road, but a $112 billion bite out of Social Security COLAs would affect today’s seniors. The chief actuary of the Social Security Administration estimates that the chained CPI will rise about 0.3 percentage points less per year than the CPI-W. With compounding, that translates to a monthly benefit cut of 8.4 percent for a retiree at age 92 (calculated from age 62, the first year of eligibility), according to the National Academy of Social Insurance (NASI).
A cut in Social Security COLAs will generate red-hot controversy among seniors already livid about flat payments over the past two years, and Social Security advocates, many of whom argue we should be moving in the opposite direction on COLA policy.
They argue that the current CPI-W measure doesn’t reflect the living costs experienced by the elderly — especially healthcare costs. Healthcare inflation has far outpaced general inflation for several decades. Medicare provides fairly comprehensive coverage, but it doesn’t cover everything, and premiums have risen sharply along with the general rise in healthcare costs. NASI notes that monthly premiums for Medicare Part B (doctor’s visits), have jumped more than fifteen-fold since 1976, to $115.40 this year.
One recent study pointed to medical expenses as a major contributor to bankruptcy among seniors.
Since 1988, the BLS has maintained an experimental index, the CPI-E, which aims to reflect the spending patterns of people over age 62. Used instead of the CPI-W, it would translate into monthly benefits about six percent higher for a retiree at age 92, NASI estimates.
“Since most of the deficit reduction (that would result from using the chained CPI) comes from cutting benefit for elderly and disabled Americans, it does point one back to the question of whether the chained CPI is more accurate for elderly and disabled Americans,” says Virginia Reno, NASI’s vice president for income security. “Evidence suggests it is less accurate than a CPI for the elderly, because it fails to reflect the significantly larger role of out-of-pocket health spending by seniors and disability beneficiaries.
Proponents of a chained CPI usually describe it as a technical correction to make COLAs more accurate — and a geeky topic only an economist could love. But it actually will have major implications out in the real world, so expect COLAs to get just as fizzy as other aspects of the Social Security debate.