A year ago, we learned that the price index on which the Social Security cost of living adjustment is based did not increase over the year, and thus there would be no cost of living adjustment that year. In our low-inflation environment, we learned last week that the price index has still not eclipsed its previous high for the purpose of calculating the adjustment, and so once again there will be no adjustment.
Unsurprisingly, President Obama is calling once again for a one-time payment in lieu of an adjustment. From the White House press office on Friday:
Many seniors are struggling in the face of the economic downturn, having seen their savings fall. Today’s news that the Social Security Administration will for a second year not provide a cost of living adjustment for social security benefits highlights these struggles. The President will renew his call for a $250 Economic Recovery Payment to our seniors this year, as well as to veterans and people with disabilities. Last year, under the Recovery Act, 56 million people benefited from the first Economic Recovery Payment—including about 50 million Social Security beneficiaries. We’re grateful that Speaker Pelosi has indicated she will bring the new Economic Recovery Payment to a vote and we urge members of Congress on both sides of the aisle to support our seniors, veterans and others with disabilities who depend on these benefits.
I think it is worthwhile to ask the same question today that I asked last year:
So why is it that retirees are having trouble weathering the recession -- because they were fired from jobs from which they had already retired or because they had trouble paying the prices that haven't gone up relative to their Social Security benefits?
It may be true that many seniors have seen their savings fall. Savings are supposed to fall for seniors as they spend down what they had accumulated in preparation for retirement during their retirement years. Perhaps a more accurate press release would have acknowledged that the Fed's policy stance of driving interest rates as low as possible has made it nearly impossible for savers to earn any income off their savings. But that's not something particular to seniors and is a topic for a different post.
So I will just repeat the recommendation from a year ago, if the politicians feel an even greater need to buy votes this year with midterm elections coming up:
If these payments are made, they should then be deducted from Social Security benefits the next time the cost of living adjustment is positive. You get the near-term infusion of cash without the longer-term increase in debt.
Last year, the absence of a COLA came as something of a surprise. With the mechanics of the adjustment more widely understood and with continued low inflation, it should not have been such a surprise this year. That means that policy makers have had a year to work on a fix to the "problem" of giving no adjustment when no adjustment is warranted by the formula by changing the formula. They could simply specify that the minimum adjustment in any year is $250 and that future adjustments as directed by the formula are (or are not) offset by any such payments. The Social Security Trustees could then incorporate that law change into their long-term projects of Social Security's financial status. Policy makers who cared about making policy would have done this. Policy makers who care about using (future) taxpayers' income to buy votes today would do something like what we are observing.