No Social Security COLA for 2011

SocialSecurityposter2 The latest manufactured outrage to fill the media and blogosphere is that Social Security will not have a cost of living adjustment in 2011. This is only the second time this has happened in the 35 years that cost of living adjustments (COLAs) have been in place. The other time was in 2010.

The AP led off its reporting on this tragedy with:

More than 58 million retirees and disabled Americans will have to go another year without an increase in their Social Security benefits, the government is expected to announce this week.

The blog WalletPop, always a little more colorful, started its post thusly:

The prediction from scholars that the Social Security Administration will announce zero cost-of-living adjustment, or COLA, to Social Security recipients in 2011 is a blow that many older and disabled Americans can ill-afford.

I think that they meant that the lack of a COLA, not the prediction of one, is an ill-affordable blow. But apparently, it is an even wider problem.

Economists say that the stagnation of income for the 58.7 million people receiving Social Security or Supplemental Security checks will have a net drag on the economy, as expenses for utilities, rent, and other unavoidable costs could possibly rise despite the government’s constancy.

Both sources (and, I can only assume, many others as well) cite this as yet another problem for the Democrats in the upcoming elections. The theory is that 58.7 million people, abandoned by the government once again, will vote the ruling party out of office.

Of course, that is totally irrational. The COLAs are not in the least bit discretionary. They are determined by a formula enshrined in a law decades old. But it is perfectly fair. The Democrats, after all, became the ruling party because the voters blamed the Republicans for an economic mess they did not particularly cause.

But the craziness goes beyond the question of blame. Obviously, a recipient of government checks would, everything else equal, prefer them to become larger. But the fact that these particular checks are not getting any larger for the second year running is not much of a grievance.

It is not that there has been no increase in the cost of living, i.e. inflation. Based on the inflation measure used by Social Security, prices went up about 1.5% from 2009 to 2010. (Exact numbers to arrive Friday.) I imagine that a “raise” of only 1.5% would have caused some complaints too, but recipients aren’t even getting that. What gives?

Well, remember back in 2008, just before the world exploded? Remember what gas cost? Due mostly to a spike in energy prices, the 2008 vs. 2007 inflation measure as used by Social Security was 5.9%. So for 2009, Social Security recipients got a nice big bump, something that was widely reported at the time as another bit of good fortune for the old folks. (Just kidding.)

Then everything came crashing down, energy prices included. The inflation number for the following year (2009 vs. 2008) was –2.2%. If I had written the COLA law back in the 1970s, that would mean that checks for 2010 would be 2.2% smaller than in 2009. Fair is fair, Grandpa.

Alas, the rule is that if prices go down, the checks stay the same. But they don’t start going up again until prices exceed the previous high. Since the inflation this year was smaller than the deflation the year before, the checks will hold steady.

(Despite the fact that the 2010 checks were arguably larger in real terms than the 2009 ones, the folks in Washington were filled with such sorrow that they sent a special $250 bonus to all recipients. Recently some fun was had with the discovery that 72,000 of those payments went to dead people. Given the scale of the operation, I actually think that’s a pretty good hit ratio.)

So the checks in 2011 will not be larger than they were in 2010, even though inflation was positive, because they stayed the same size in 2010, even though inflation was negative. And they are still larger in real terms than they were two years ago, something you are not likely to see pointed out in very many places.

I am sure that many retirees could really use a little more from Social Security just now, but the fact that they are not going to get more next year is hardly an injustice or, for that matter, much of a surprise.

No Comments

  • By Stagflationary Mark, October 12, 2010 @ 12:50 pm

    I agree with you completely on this, and that’s something as I actually have “stagflationary” in my name (since 2007).

    Much of my net worth sits in CPI adjusted I-Bonds and TIPS. I am not complaing about the lesser income brought on by very low inflation (and/or deflation) in the slightest.

    On a related note, I’m growing weary of reading comments elsewhere that it is a conspiracy, that the CPI excludes food and gas (it does not), or that *everything* is going up in price. Really? Everything? Even house prices and natural gas?

  • By jim, October 12, 2010 @ 4:24 pm

    Blaming current politicians (of either party) for how the social security COLA adjustments work is pretty irrational.

    COLAs for Social security is a major positive benefit of social security that is generally taken for granted and underappreciated. Put a COLA into an annuity and causes a big increase in the present value cost.

  • By SteveDH, October 15, 2010 @ 3:57 pm

    I agree with the article but wait: I’m retired and a SocSec recipient shouldn’t I be complaining? Actually I’ve spent less this year than in previous years and haven’t experienced much inflationary pressure on my budget. No raise No problem but don’t tag me as Grandpa – I’m more than that!

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