November 30, 2010

Artificially Sweetening the COLA

Summary

Providing a COLA or one-time payment beyond what is warranted by an increase in the CPI would actually increase “real” benefits, artificially sweetening the COLA.

For the second year in a row, Social Security recipients will not receive a cost-of-living adjustment (COLA) increase to their monthly benefits. Social Security benefits only rise when prices go up; in years with low price inflation, they remain steady. And although low price inflation benefits all consumers, Congress has proposed to give every Social Security beneficiary a $250 check, which could cost taxpayers $15 billion.

While it might sound reasonable or fair to give seniors a boost during tough economic times, giving in to such demands would be misguided and undermine the very reason for tying cost-of-living adjustments to the Consumer Price Index (CPI) in the first place—to prevent yearly interest-group lobbying for higher benefit increases and, as the name implies, only provide an adjustment when there’s an actual CPI-measured increase in the cost of living. Providing a COLA or one-time payment beyond what is warranted by an increase in the CPI would actually increase “real” benefits, artificially sweetening the COLA. 

Millions of Americans rely on Social Security benefits for income protection. In fact, 64 percent of all beneficiaries rely on Social Security to provide 50 percent or more of their incomes, while 34 percent rely on benefits for 90 percent or more of their incomes. For nonmarried beneficiaries, including widows, the reliance is higher with 73 percent relying on benefits for 50 percent or more of their incomes and 43 percent relying for 90 percent or more of their incomes. 

Social Security also lifts millions of people out of poverty. While it is important to note that the existence of Social Security likely causes people to save less than if the program did not exist, one study suggests that up to 19.8 million people would be considered poor without Social Security benefits, including 13 million seniors, 5 million adults under age 65, and 1 million children under age 18.