Two ad hoc COLA bills proposed

Two pieces of legislation have been proposed to make one-time payments to compensate for the lack of a Social Security COLA net year.

The first bill, the Emergency Senior Citizens Relief Act, is sponsored by Sen. Bernie Sanders in the Senate and Reps. Peter DeFazio and Maurice Hinchey in the House. It would make a one-time $250 payment to all Social Security beneficiaries, railroad retirees, SSI beneficiaries and adults receiving veteran benefits. The sponsors would finance this payment by applying the 12.4 percent Social Security payroll to individuals earnings between $250,000 and $359,000 in 2010.

While this is presumably not a big concern to the bill's sponsors, their plan would raise the marginal tax rate paid by affected individuals from 33 percent under current law to around 45 percent. On top of this, affected individuals would pay the Medicare payroll tax of 2.9 percent and state income taxes, which average around 6 percent. While I expect the country will be out of recession in 2010, it still seems unwise to have a large number of people paying total marginal tax rates approaching 52 percent of their income.

The second bill is sponsored by Carolyn McCarthy and would make a $150 payment to each Social Security beneficiary. Given the smaller payment and more limited universe of recipients the costs of the McCarthy bill would be smaller. However, no funding stream is specified for the payments. One thought: in justification of her bill, Rep. McCarthy cites rising Medicare premiums: "Medicare Part B costs, for example, have gone up by an average of 7.8 percent over the last five years and are projected to rise in 2010 by as much as 9 percent." But as I discussed here, for the vast majority of seniors Part B premiums can't go up in a year without a COLA.

A broader thought that applies to both bills: this year Social Security paid a larger COLA than inflation subsequently justified. Even if no COLA will be paid next year, seniors will actually come out ahead. That is to say, the buying power of their benefits did not go down. To fix this non-problem, the Members of Congress above propose a one-time COLA payment of $150-$250 next year. The following year, of course, this payment will cease and the buying power of Social Security benefits will go down. How will we fix that problem?