Why seniors get upset when there isn’t a Social Security COLA

This Associated Press article gives a good idea of why seniors are so upset about the lack of a Cost of Living Adjustment (COLA) to Social Security benefits this year.

As I explained in a recent LA Times op-ed, in 2009, Social Security received a 5.8 percent COLA, the largest since the 1980s, due to large increases in energy prices in 2008. By the end of 2008, however, energy prices had dropped significantly, so much so that the entire increase in overall prices has been erased. The result is that the purchasing power of Social Security benefits is now significantly higher than it was in 2008: benefits rose, but overall prices didn't. Put another way, if prices decline but the Social Security COLA can't be negative, the real purchasing power of benefits increases. Likewise, if Medicare spending increase but those costs aren't reflected in higher Medicare premiums, that's like giving free money to Medicare beneficiaries. That's pretty much what we're experiencing now.

The problem is, most press reports – including this one – don't explain this very clearly. As a result, it plays as a story in which seniors are being hurt when that's really not the case.

I was quoted in the AP story saying,

"Seniors may perceive that they are being hurt because there is no COLA, but they are in fact not getting hurt," said Andrew G. Biggs, a resident scholar at the American Enterprise Institute, a Washington think tank. "Congress has to be able to tell people they are not getting everything they want."

Judging from the emails I've been receiving in response to this quote, the basic story regarding COLAs isn't being conveyed to the public.

Update: While the AP story correctly states that Social Security checks could fall because of rising Medicare Part D (drug benefit) premiums, it doesn't say by how much these premiums would rise. The answer, according to the Center for Medicare and Medicaid Services, is around $2. This covers about one quarter of the total increase in Part D costs, the rest of which are covered by the government. In addition, the rule against a negative COLA implies that Social Security benefits in 2009 were higher in real terms than in 2009 by around 5 percent. Since the average Social Security benefit is around $1,061, this implies an increase in purchasing power of around 53 dollars. On top of this, most retirees will receive increased Medicare Part B benefits without having to pay higher premiums, since premiums don't rise if there is no COLA.