October 20, 2009
By David C. John
Since Social Security recipients will get no cost-of-living
adjustment (COLA) next year, President Obama wants to give each of
them $250, a move supported in principle by the Republican House
and Senate leadership. However, this move is not only unjustified;
it makes a fundamental change to Social Security's structure and
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 that the cost of living has gone down,
thus increasing the amount that recipients can buy with their
existing benefits. And the benefit would mean even larger spending
in a year with record deficits. This new $250 payment would follow
the earlier $250 payment that each Social Security recipient was
paid through the stimulus package this year.
COLA Increase Not Justified, Nor Is
Every January, Social Security recipients' benefits are adjusted
for inflation to preserve the purchasing power of their benefits. In
January 2009, 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 does not mean that 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 also not see
an increase in their Medicare premiums.
By law, Medicare Part B premiums are to cover 25 percent of the
cost of those benefits, while 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 do not
increase, then the Part B premium does not increase for most
beneficiaries, even though the cost of the program increases.
This means that 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 that on
average, Social Security recipients will receive an increase in
purchasing power equal to 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
Ironically, while Social Security recipients would be better off
after receiving this proposed $250 bonus, Medicare's abysmal
financing would deteriorate further because beneficiaries' premiums
would remain frozen. The real losers are taxpayers, who would have
to bear both the $13 billion cost of the $250 bonus and the higher
general revenue payments to Medicare.
The $250 Payment Starts to Change
Social Security into Welfare
Proponents of this increase tacitly acknowledge this fact when
they base arguments in favor of the $250 payment on decline in
401(k) assets or housing values. While no one disputes that many
retirees have a tough time getting by on Social Security, Social
Security's COLA is strictly intended to make up for the effect of
inflation on those benefit payments, not for any other changes to a
retiree's income or net worth. Any attempt to use Social Security
or its COLA to make up for a reduction in other assets or income
starts to change Social Security into a welfare program.
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 that 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, while the Republican endorsed version would
pay for it from unspent stimulus money. Either approach would spend
money the federal government does not 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. And the odds rise
sharply that Congress will interfere with Social Security benefits
any time that it wishes, even if its actions change the nature of
the program and endanger the wide and bipartisan support that it
Spending Money America Does Not
If Congress is determined to pay a $250 bonus to Social Security
recipients--even though a fair and time-tested formula shows that
it is not justified--then it should at least be honest with itself
and the taxpayers by calling the payments what they are:
The goal of each generation is to make sure that its children
and grandchildren have a better standard of living than their
parents did. The seemingly innocent $250 payment is nothing less
than taking $13 billion of this nation's children's money and
paying it to current Social Security recipients. It is a poor
legacy to leave future generations.
David C. John is Senior Research Fellow in
Retirement Security and Financial Institutions in the Thomas A. Roe
Institute for Economic Policy Studies at The Heritage
Show references in this report
Social Security COLAs are calculated based on
the change in the consumer price index from the end of the third
quarter of one year to the end of the third quarter of the next
year. Thus, the January 2010 Social Security COLA will be based on
the change in the CPI from September 30, 2008, to September 30,
2009. Since there will be no COLA in 2010, the law states that
future COLAs will be calculated based on the change in prices from
September 30, 2008.
cap on the Part B premium does not apply to one in 20 beneficiaries
(mostly upper-income recipients, subject to the income relating
mechanism). Part D premiums are also deducted automatically from
Social Security benefits, and the average annual increase for 2010
should be $93. However, Part D premiums can increase by more than
the Social Security COLA. According to the Centers for Medicare and
Medicaid Services, the annual increase for 2010 would be about
Andrew Biggs, "A Diet COLA for Social Security? Not Really,"
American Enterprise Institute, October 2009, at http://www.aei.org/outlook/100076 (October
President Obama wants to give each Social Security recipient $250.But this would start converting the program to a welfare program.
David C. John
Senior Research Fellow in Retirement Security and Financial Institutions
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