Looks like you're going to get a COLA this year

Calculated Risk has a nice post on the rise in the CPI-W, the measure of inflation used to calculate Social Security COLAs. After several years in which the CPI remained below its historical high, meaning that no COLAs would be paid, a surge in prices over the past year -- presumably driven on the food and energy sides -- means that a COLA is likely to be paid in January, 2012. Here's a nice chart showing the CPI, marking the points where COLAs were calculated.


The bad news: this also means that Medicare Part B premiums will go up, since for most people they can't rise in years without a COLA. Also, the maximum taxable wage -- currently $106,800 -- will rise as well. Check out Calculated Risk's post here. Read more!

Bloomberg poll on Social Security/Medicare reform options

Hot Air points to a new Bloomberg poll regarding the budget deficit, highlighting several results that seem to indicate that – despite everything Americans have been through regarding the economy and financial markets – that they want "privatization" of Social Security and Medicare to be "on the table." For instance, Bloomberg says:

Almost three in five say privatization of the Medicare program, with assistance for low-income seniors, should be considered when lawmakers discuss how to close the budget gap. A majority, though, oppose raising the age at which people can start receiving Medicare benefits. Americans are narrowly against lawmakers considering Social Security privatization as a means to reduce the deficit. Forty-eight percent say that should be off the table versus 44 percent who want the possibility looked at. Almost three in four favor lawmakers studying removal of the Social Security tax cap so wages over $107,000 a year are taxable.

Some caveats. First, as Hot Air points out, the most popular option is to have someone else pay for it all, through an increase in the maximum taxable wage for Social Security. But since that won't be enough to fix the whole problem and comes with some pretty negative side effects, it's worth considering other options. But second, "privatization" of Social Security won't fix the program's funding gap. It might better help us build assets to pay for future benefits and it would allow low-earners to better diversify their retirement savings, but the underlying funding gap for Social Security is the same whether you have personal accounts or not. "Privatization" of Medicare – if it means shifting to a premium support model in which the government supplements the purchase of private health insurance -- has more potential because it would shift incentives to increase cost-effectiveness and, in any case, the government could place a limit on the growth of the supplements it pays.

And third, the poll's options – "strongly considered," "considered" and "off the table" – may not be the optimal ones for getting at these choices. But it is fair to say that if someone says a given option should be strongly considered or considered that it's at least "on the table."

Better measurement of public opinion would be really helpful in figuring out how to fix the entitlement funding gap. The government and the budget don't really "care" how these programs are balanced so long as it's done. But individuals care a lot about whether to pay higher taxes, receive lower benefits, or work longer. The more we know about what they want, the better we can tailor reform plans to meet their needs.

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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.

Read more!