The title of this article is from a headline in the July 26,2011 issue of USA Today. If you are receiving Social Security or close to doing so, it sure grabs your attention. Yikes, my monthly income is going down?
What the article is really saying is that future increases in benefits may be slightly lower than if the current inflation formula is used. So the headline should more accurately read:
“Social Security payments would increase at a slightly lower rate with new inflation gauge.”
Of course, such a statement would not grab your attention, scare seasoned citizens or be consistent with the political views of the mainstream press.
The change in the inflation calculation is called chained inflation CPI. So, how much of a hit to Social Security benefits are we talking about? According to the article the change would mean 0.3% less of an increase in payment. That is three tenths of one percent.
In June 2011 the average Social Security monthly payment was $1,079. Let’s do some math. If benefits were to increase by 3% each year for ten years the benefit would go from $1,079 to $1450.09. However, if the new formula is used, the benefit after ten years would be $41.67 less than the current formula or $1408.40 (rounding). Looking at it another way, in the first year of the new formula the monthly increase is $3.24 less than an increase under the current formula. The benefit still increases, just not as much. Clearly the payment did not fall.
There is more to the story. The theory behind the new formula is that people adjust their buying for inflation. As the USA article illustrates, if the price of beef increases people will buy less beef perhaps turning to chicken thereby compensating for the higher inflation associated with beef. The new Social Security inflation factor would then track the price of chicken not beef.
The inflation formula used to calculate the Social Security COLA has been questioned for many years. In general it tends to overstate the impact on seniors of some items they are less likely to be purchasing once retired. Adjusting the formula as a relatively painless way of stabilizing Social Security has been suggested in the past.
Needless to say politicians on the left see this as pinching the elderly and one has to assume the AARP is not thrilled either. However, a difference of a few dollars over a decade seems a small price to pay to save hundreds of billions of dollars for the rest of Americans.
Since 1975, Social Security general benefit increases have been cost-of-living adjustments or COLAs. The 1975-82 COLAs were effective with Social Security benefits payable for June in each of those years; thereafter COLAs have been effective with benefits payable for December.
Prior to 1975, Social Security benefit increases were set by legislation.
And there you have the essence of the problem. Rather than increasing benefits by legislation when affordable, Congress in its wisdom fixed a problem and set the COLA on automatic without regard to future changing economic or fiscal conditions. Today making a reasonable adjustment to this process is attacked as lowering Social Security benefits. COLAs are common in government pensions and as with Social Security they have created fiscal problems for the states. NJ just suspended COLAs until the pension trust reaches a funding status target. I managed a corporate pension plan for decades and over that time we granted seven increases in pensions, each time following a detailed analysis of the economics of the company, past inflation, the additional liability that would be created and the additional funding required. Many times a COLA proposal was rejected. That is the difference between accountability and political decision-making.
Related articles
- Modifying inflation index for Social Security COLA and other federal adjustments. Budget negotiators are on to something, too bad the AARP doesn’t like it (quinnscommentary.com)
- Social Security COLA, how is it calculated and what is the possible COLA for 2012 (quinnscommentary.com)
- Social Security payments would fall with new inflation gauge (usatoday.com)
QUINNSCOMMENTARY 
It pass time for people to take a stand.Do not let those money hunger Republican that got drug company and so many more given the large sum money,they do not care about any booby else.OH Look Out When You Face GOD,He dose not except money.But he dose say if you do some wrong to a child of his,you best have a mile stone around your neck.If you meet me and for got me it all right,but if you meet God and for got him you lost ever thing.If you die today or any time where would you go.
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It is about time that all Congressmen, Senators etc. start paying their share of Social Security. They get one of the highest retirements payments then any company that I know of and also free medical for the rest of their lives. What about the poor people or even the middle class. Keep raising everthign and cutting or lowering the cola on Social Security so the big wheels can give themselves raises. I am tired of the government and what they do with our money. I hope the next election everyone is voted out and a fresh new government is formed.
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Members of Congress pay Social Security like everyone else and have since 1984. They have no special health benefits they partcipate in the same plan as government workers and pay their share if the premium like all other workers. Few Cobgressmen actually receive a government pension and for those that do it is fairly modest averaging about $35,000 a year after twenty or more years if service.
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