Monday, August 24, 2009

How much would it cost to pay a Social Security COLA this year?

I've received a lot of what I'll euphemistically call 'feedback' with regards to my comments in Sunday's AP story on the Social Security COLA. I've explained my views a little more fully here – short story, the COLA is to adjust for inflation; no inflation means there should be no COLA – but wanted to follow up a little more given the enthusiasm with which my emailers have expressed their desires for a COLA in 2008.

Let's assume we did what my emailers and many on Capitol Hill want to do: pay an ad hoc COLA in 2010, despite the fact that levels of inflation don't under current law warrant a COLA. How much would it cost?

Well, let's assume we pay a 3 percent COLA. That's pretty typical of inflation levels historically. That would imply a 3 percent increase in all Social Security benefits. But here's the problem: unless you want to not pay a COLA in the future – which is exactly what people are so worked up over today – then all Social Security benefits will be 3 percent higher than they'd otherwise be, both for current retirees and future ones. If we try to re-coup the costs later by not paying a COLA in some future year we'll have exactly the same problem that we're now so intent on buying our way out of. And if we limit the benefit increase to current retirees and cut off future ones, then we'll create a "notch" that will generate political headaches for years to come.

So under reasonable expectations of the political process, a COLA fix today implies a permanent increase in Social Security costs. What would a 3 percent increase in costs do to Social Security's long-term deficit? Well, under the latest Social Security Trustees Report, 75-year Social Security revenues average 14.02 percent of taxable payroll while costs average 16.02 percent of payroll. The difference is what produces the 75-year actuarial deficit of 2 percent of payroll.

Now, if we increase costs by 3 percent, then the cost rate rises to 16.5 percent of payroll while income stays at 14.02 percent of payroll, producing a 75-year shortfall of 2.48 percent of payroll. That's a 24 percent increase in the long-term Social Security deficit, just to address the fact that people want a benefit increase to adjust for inflation even when there's been no inflation to adjust for. Go figure.

2 comments:

San said...

It must be nice to live in your world. Have you ever looked into the increase in Supplemental Health Insurance Premiums and how they align with COLA?

These premiums increase as soon as seniors get their COLA increase. Go check the history of this. Look at United American's billing practices.

So are you going to work to mandate that if seniors don't get their COLA neither should the Health Insurance Companies? Or should those of us who have NO ability to increase our incomes just turn to cat-food casseroles?

Sounds disgusting? welcome to the world of the rapidly rising majority of seniors.

francois said...

It's well known that the CPI is not a perfect measure of inflation. However, if you want a better one that more accurately measures what seniors actually pay for, it won't matter in the long term. Seniors drive less, so if we used a special senior COLA last year, most of the 5.9% increase would have been wiped out.

So you got a bigger increase last year than you were entitled to based on your actual living costs, but of course you didn't complain because the CPI worked to your advantage. Now the CPI goes against you, so you want something different?

Or do you just feel entitled to ever greater benefits based in no way on what you actually paid in?

The younger folks are going to get a lot less than current retirees compared to what they paid in. There is no way to avoid that. By asking for more for yourself now you are taking directly out of your kids' pockets. Money they'll need when they get old but which won't be available because you spent it now.