Thursday, September 3, 2009

Las Vegas Review Journal: It's not called a "Cost of Living Increase." It's called a "Cost of Living Adjustment."

The Las Vegas Review Journal
weighs in on the COLA debate:

It's not called a "Cost of Living Increase." It's called a "Cost of Living Adjustment." So when inflation leads to increases in the cost of living -- which is most of the time -- seniors on Social Security and others who expect government "COLAs" get annual raises.

And when economic hard times lead to falling home prices and a falling cost of living, the "adjustment" clause means taxpayers get a break -- the cost of living "adjustment" means we actually get to send the recipients a smaller check, right?

Uh ... wrong. Actually, the Social Security law says the "COLA" ratchet works in only one direction. The payments can't be reduced. So even though a more accurate assessment of this year's cost of living might lead to smaller Social Security checks being mailed out in 2010 -- for the first time in living memory -- in fact the federal government has announced that (barring some political meddling this month) they will simply stay the same next year.

This isn't a bad deal for the recipients. But that hasn't stopped many from complaining.

A few points raised in the editorial are worth some comment:

First is the question of the whether the CPI-W (where W denotes urban workers) is a decent measure of inflation for seniors. The Journal says: "Seniors complain that more affordable home computers and other electronic gear and even lower energy bills are all very nice, but hardly compensate for increasing medical costs (rising faster than inflation) for those who spend a disproportionate amount of their income on health care." This is a legitimate point, but even if we measured inflation using the CPI-E, which reweights the CPI to match the purchasing habits of seniors, inflation would have been negative last year and no COLA would be paid this year. Moreover, both the CPI-W and the CPI-E are widely believed to overstate inflation because they don't account for how individuals alter their purchases as prices change. An alternate measure, the chained C-CPI-U, does adjust for a changing market basket and shows generally lower inflation (by around 0.3 percentage points). It's likely that a true inflation measure for seniors wouldn't be that much different from the CPI-W currently used for calculating COLAs.

Second, the editors say: "Many will see their monthly federal stipends actually drop, as premiums for the Medicare prescription drug program, which often are deducted from Social Security payments, are scheduled to go up." This is true for Medicare Part D premiums, which will rise by an average of $2 per month next year. But Medicare Part B premiums, which are much larger, cannot rise in a year without a COLA. This will save the typical retiree almost $100 next year. So on net, retirees are around $75 better off on the Medicare front.

Finally, the editors ask: "But if the cost of living is actually down, why did President Obama announce this week that federal employees won't get a 2.4 cost-of-living raise this year -- they'll have to "settle" for a 2 percent raise?" Here I have to make an at least half defense for the President. Wages generally rise at a rate higher than inflation to account for rising productivity. Average wages rise around 1 percent a year above the inflation rate. Now, is a 2 percent increase in a year in which inflation was negative justifiable? Well, if the productivity of the federal workforce rose really fast I guess it is, but count me skeptical on that.


Fay said...

Someone should check their math on the following statement:
"But Medicare Part B premiums..., cannot rise in a year without a COLA. This will save the typical retiree almost $100 next year. So on net, retirees are around $75 better off on the Medicare front."
While the Part B premium may reach $100/month, to my knowledge, it has never risen by that amount. The Part B increase that is waived will be offset by the actual Part D increase which will result in SS recipients receiving the same or less in their SS checks in 2010. Go figure!

Andrew G. Biggs said...

I don't have the numbers in front of me, but the standard Part B premium this year is around $96 and is scheduled to rise to around $104 next year. If it doesn't, you save $8 per month times 12 months which equals $96. Part D premiums are scheduled to rise by around $2 per month, which pulls around $24 off the annual savings. So on net the typical person would be around $72 better off next year.

Fay said...

I'm the one who should go figure! You are absolutely correct in your calculation. I was mistakenly looking at the monthly amount instead of the annual amount. However, even with your clarification, I do not feel any better off than I did before.