Should Social Security benefits be tied to the Consumer Price Index?

WASHINGTON – Social Security payments are not projected to increase in the next two years, leaving some senior citizens disgruntled.

“So far, [President Barack Obama’s] administration has been producing a lot of reform legislation geared toward protecting young people,” said Camille Abrams, a retired African-American senior taking her usual evening walk on the National Mall, in spite of her arthritis. “But when it comes to issues like health care and Social Security, I feel like the older generation is being short-changed.”

She worries about how her Medicare costs, which are deducted from her monthly Social Security (SS) payments, are going to affect her monthly check.

“As it is, there is hardly ever that much to go around once my Medicare costs are accounted for,” said Abrams. “Far less now, if Social Security payments end up staying the same.”

Abrams admitted, however, that she did not know why the payments risked being capped.

“I thought it had something to do with [the Social Security Administration] trying to close the high Social Security [debt],” she remarked.

Experts say that such confusion is common.

Though the debt on Social Security was last measured at $6.5 trillion in 2008, projections that payments will not increase are based more squarely on the fact that benefits are adjusted to accommodate changes in inflation, which affect the cost of living.

Because inflation ran negative in 2009, and since the law dictates that Social Security payments can never go down, the Congressional Budget Office predicts that cost-of-living-adjustments (COLA) will not be applied for 2010.

In fact, the economic forecast in March predicted that the Consumer Price Index for urban wage earners (CPI-W), which SS payments are tied to, will not reach third-quarter 2008 levels again until the third quarter of 2011. The CPI-W determines changes in the price of common goods, including food and energy, due to inflation for lower-earning employees. This group represents about 32 percent of the population, according to the Bureau of Labor Statistics.

This is why Social Security payments are not expected to rise in the next two years.

Payments are adjusted each January according to changes in the CPI-W during the third quarter of the previous year.

Since the cost-of-living has only trended upward during the past few decades, retirees have never encountered a year in which their Social Security payments have not risen. As a result, even if some seniors are aware that inflation has actually run negative this year, they are geared to think they are losing out, say experts.

Andrew Biggs, resident scholar at the American Enterprise Institute, said the drop in CPI-W, also due to lower energy prices and demand throughout 2009, means that some retirees will actually receive raises in their SS payments, in spite of the expected ceiling.

Biggs said that an increase in inflation in the third quarter of 2008 resulted in a 5.8 percent increase in cost-of-living-adjustments (COLA) for SS payments in January 2009. But falling energy prices from the end of last year until now means that the COLA was about 4.3 percent higher than it needed to be. Since SS payments total about $1,000 per month, seniors will actually receive a raise worth about $43 per month, or $516 per year, Biggs said.

“From a psychological viewpoint, I can understand the panic of not receiving an SS payment increase if that’s what you’re used to year-to-year,” said Biggs, “But I think seniors need to be reminded that they are dealing with COLAs, and are actually lucky that SS payments can’t legally adjust down when inflation does.”

Biggs is also aware that automatically deducted premiums for Medicare Part D are expected to increase, which will, in effect, lower the capped monthly SS payments even further, but says that this extra expense is relatively negligible. According to the Center for Medicaid and Medicare services, average monthly part D premiums will increase by $2 (or $24 annually).

But Monique Morrissey, from the Economic Policy Institute, said that health care costs can still be a burden to some seniors who have had to deal with other effects of the recession – such as seeing portions of their housing equity “go up in smoke,” or their 401K investments drop by nearly a quarter.

“It may be true that the CPI-W has decreased during the later part of 2008 and has continued to do so in 2009, but this can hardly qualify as a ‘raise,’” said Morrissey. “Even though prices have fallen on consumer goods and utilities, when you’ve got people who have faced significant losses in personal assets, you simply can’t say that the cost-of-living hasn’t increased.”

Morrissey also said that SS payments are possibly inappropriately adjusted to changes in the CPI-W, and should instead be adjusted to the CPI for the elderly (CPI-E), since prices for goods needed by the age 62-and-older group tend to increase at a faster rate.

In fact, since 1982, five years before the Bureau of Labor Statistics began measuring the CPI-E index, the CPI-E rose by 126.5 percent, compared with the CPI-W’s rise of 110 percent during the same period. Annually, that’s a 3.3 percent increase in CPI-E, compared with a 3 percent increase in CPI-W.

Now that many advocate groups for seniors have begun pushing for a cost-of-living increase to SS payments for subsequent years, in spite of the projection, Biggs worries that Congress will accede.

“I can easily see Congress passing an ad hoc COLA to SS payments in response to senior citizens’ outrage,” Biggs said, adding that he thinks such a move, if it were to gain footing, would win bi-partisan support due to Republicans’ renewed outreach to senior citizens for votes. “The average annual COLA is about 3 percent, and Congress could decide to create about a 1.5 percent COLA just to appease senior citizens.”

“That would not only increase the Social Security deficit a lot, it would also send the wrong message – namely, that COLAs are simply raises promised to them by the government, rather than meaningful compensatory implements for changes in inflation,” Biggs added.