October 27, 2009

October 27, 2009 | Commentary on Social Security, Medicare

Turning Social Security into Welfare

Seems simple: Social Security recipients will get no cost-of-living adjustment (COLA) next year, so President Obama wants to give each of them $250. The Republican House and Senate leadership support the move in principle.

They shouldn't.

For one thing, this move is unjustified. For another, it makes a fundamental change to Social Security's structure. It starts the process of converting the program from an earned benefit funded by a worker's own contributions to a welfare program.

While there will be no Social Security COLA, benefits will not decrease, despite the fact the cost of living has gone down. So the amount recipients can buy with their existing benefits is going up. So why have a new $250 payment, especially atop the earlier $250 payment each Social Security recipient received through the stimulus package this year?

Every January, Social Security benefits are adjusted for inflation to preserve their purchasing power. This year, Social Security benefits increased by 5.8 percent, a number that mainly reflected the temporary increase in the price of oil for much of 2008, overstating the real cost of living increase experienced by seniors. However, this year the cost of living actually declined by almost 5 percent, and since there was no inflation, there will be no COLA in January 2010.

This doesn't mean seniors and other recipients are worse off -- far from it. First, their current benefit buys more than it did at this time last year. Second, most retirees will see no increase in their Medicare premiums.

By law, Medicare Part B premiums cover 25 percent of the cost of those benefits; general revenues cover the other 75 percent. Part B premiums are deducted automatically from Social Security benefits but for most beneficiaries cannot increase in dollar terms by more than the increase in the Social Security COLA. Thus, if Social Security benefits don't rise, then the Part B premium doesn't rise for most beneficiaries (even though the cost of the program increases).

This means the share of Part B costs paid by recipients would drop below the 25 percent mandated by law and general revenues (i.e., the taxpayers) would have to pick up a higher share of Part B's costs.

As a result of the drop in the cost of living and the freeze in Medicare Part B premiums, AEI's Andrew Biggs has estimated on average, Social Security recipients will see their purchasing power go up by about $725 next year. Seniors on Social Security benefit from the reduction in the cost of living because the law freezes their benefits when prices drop. So in effect, seniors would get a raise, even though the cost of living has decreased.

Taxpayers, meanwhile, would have to bear both the $13 billion cost of the $250 bonus and the higher general revenue payments to Medicare.

Since Social Security started in 1935, its benefits have been earned and paid for by its own payroll taxes. A bipartisan consensus has preserved the fact recipients are not receiving a gift from the government but rather a benefit based on explicit taxes paid by the worker.

However, both the Obama proposal and that agreed to by Republican leaders breaks that connection.

The Obama plan would evidently pay for the $13 billion cost from general revenue taxes; the Republican-endorsed version would pay for it from unspent stimulus money. Either way, we would be spending money the federal government doesn't have, thus adding to the deficit. Both are steps on a slippery slope toward making Social Security a welfare program with benefits set by Congress rather than being based on the recipients' earnings.

If Congress is determined to pay a $250 bonus to Social Security recipients -- even though a fair and time-tested formula shows it isn't justified -- then it should at least be honest with itself and the taxpayers. Call the payments what they are: welfare.

David John is a senior research fellow at The Heritage Foundation.

About the Author

David C. John Senior Research Fellow in Retirement Security and Financial Institutions
Thomas A. Roe Institute for Economic Policy Studies

Related Issues: Social Security, Medicare

First Appeared in the St. Paul Pioneer Press