A Project of The Annenberg Public Policy Center

Social Security COLA


Q: Will Social Security recipients be denied a cost of living increase next year? Are Democrats to blame?

A: There won’t be a COLA increase paid this January, and probably not in January 2011, either. But the cause is volatile oil prices, not anything done by the current Congress.

FULL QUESTION

I received this e-mail yesterday:

Social Security………………

For the first time in history, the Democratic Congress will not allow an increase in the social security COLA (cost of living adjustment).
[EET ]

In fact, The Henry J. Kaiser Family Foundation predicts there may not be any COLA for the next three years.

However, the per person monthly Medicare insurance premium will be increased from the 2009 premium of $96.40 to $104.20 in 2010 and to $ 120.20 for the year 2011.

Send this to all seniors that you know. Remind them to not vote for the incumbent senators and congressmen in the 2010 and the 2012 elections.
[/EET]

FULL ANSWER

Social Security checks have gone up automatically every year since 1975, when the first automatic cost-of-living adjustment (COLA) took effect. Prior to that, a separate act of Congress was required to grant any adjustment to compensate for inflation. But this January, there won’t be any COLA, for the first time in the 35 years the system has been in operation.

The reason is simple: The official measure of the cost of living has gone down, not up.

And the major reason for that is that oil prices plunged from the peaks of the previous year.

It’s a reversal of what happened last year, when soaring fuel prices pushed the cost of living measure sharply upward, producing the 5.8 percent COLA increase that went into effect last January. That was the largest increase since 1982.

That came about because, by law, the COLA is determined by the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W), which is tabulated by the career professionals at the U.S. Bureau of Labor Statistics. And from the third quarter of 2007 to the third quarter of 2008 (the period determined by law) the CPI-W went up 5.8 percent.

But now things are different. The CPI-W peaked a year ago, just before the 5.8 percent increase was calculated, and took a nose dive in the months that followed. Quarterly figures won’t be available until October, but based on monthly figures, the CPI-W now stands 1.9 percent below where it was 12 months before.

CPI-W, All Items

Source: Bureau of Labor Statistics

If Congress had simply pegged the COLA to the CPI-W, that would mean Social Security benefits would have to be reduced in January by somewhere around 2 percent, depending on what the final quarterly figures turn out to be. However, the 1972 law that set up the COLA specifies that benefits can’t be reduced. So it is a certainty that when the Social Security Administration announces next month what the COLA will be for January, it will be zero.

And that’s not all. There will be no COLA for January of the following year, either, unless the CPI-W rises to a level above 215.495, where the index stood in the third quarter of last year. And current economic forecasts are calling for relatively low price inflation for many months to come, as the economy struggles with continuing job losses. That makes it likely there will be no COLA in 2011, either. According to the annual report of the Social Security Trustees: "A substantial decrease in the CPI from the level of the third quarter of 2008 is projected to result in zero COLAs for December 2009 and December 2010, and a small COLA increase for December 2011." (Benefits for December are paid the following month, so from the recipient’s point of view this translates into no benefit increase next January or the January following, and perhaps a small increase in January 2012.)

So, why did the CPI-W rise so high, only to fall so far? In a word: oil.

That’s not the only factor of course. Plunging home prices and a recession that has brought about historically low mortgage rates have also had their effects on the CPI. But the major factor has been wild swings in the price of crude oil and everything made from it.

Few motorists have forgotten that the price of regular gasoline at the pump exceeded $4 a gallon not long ago. Regular gasoline peaked at a national average of over $4.11 in early July 2008 – during that crucial third quarter used for calculating the COLA. But then the world price of crude oil collapsed, diving from a peak of $137 per barrel in July 2008 to a low of less than $35 in January, according to weekly averages from the U.S. Energy Information Administration. And the price of regular gasoline fell to less than half of what it had been – bottoming out at just over $1.61 at the end of last year. It has bounced back since then, but the most recent average is still just $2.59 per gallon – lower than it was four years earlier.

CPI-W, All Items Less Energy

Source: U.S. Bureau of Labor Statistics

Without the yo-yo effect of energy prices, the COLA for last January would have been barely half as large. The CPI-W for all items except energy rose only 3.1 percent during the period, based on monthly figures available on the BLS Web site. But there also would have been a COLA increase this coming Janaury, too, and probably the year after as well. That’s because the CPI-W for all items except energy rose 1.5 percent in the last 12 months. Compare that to the 1.9 percent decline for all items including energy.

Whatever the cause, Social Security recipients are going to feel squeezed this January, simply because they have become accustomed to annual increases. And about one in every four really will be squeezed, because their Medicare premiums will increase. The AARP estimates the number at 11 million.

Generally, Medicare premiums don’t rise when the Social Security COLA doesn’t rise, because of an obscure "hold harmless" provision in the law. But that doesn’t apply to those newly enrolled in Medicare, to those who pay higher Medicare premiums based on their high incomes, or those who don’t follow the usual practice of having their Medicare premiums deducted from their Social Security checks.

But regardless of how severely seniors may feel a pinch this January, it’s the price of oil and the flat economy that’s to blame, not today’s Democrats. Those who insist on blaming a politician might consider this: The law that produced this result was signed July 1, 1972 – by President Richard Nixon, a Republican. And Nixon claimed credit for pushing it through Congress: "This provision is one which I have long urged, and I am pleased that the Congress has at last fulfilled a request which I have been making since the first months of my Administration."

Footnote: The CPI-W is not the same index that is generally tracked by news organizations when reporting on official "cost of living" figures. That is the Consumer Price Index for All Urban Consumers (CPI-U). The difference is that the CPI-W covers only about 32 percent of all U.S. households, and includes only those of wage earners and clerical workers. The CPI-U is a broader measure, which covers approximately 87 percent of the total population. It includes all those in the CPI-W plus professional, managerial and technical workers, the self-employed, short-term workers, the unemployed, and retirees and others not in the labor force.

The yo-yo effect of volatile oil prices would have been less if Congress had chosen to peg the Social Security COLA to the CPI-U and not to the CPI-W. That’s because energy costs make up a larger portion of the CPI-W (9 percent) than of the broader CPI-U (7.6 percent). But the general effect would have been the same: a big COLA for this year and none for next year. For example, the CPI-U for all items fell 1.5 percent over the past 12 months, compared to 1.9 percent for the CPI-W.  Either figure would produce a zero COLA for January.

-Brooks Jackson

Update, Sept. 25: Members of Congress won’t get an automatic pay raise in 2010, either. They voted in March, as part of an omnibus appropriations bill, to deny themselves any raise for the coming year. Full details are in a FactCheck Wire item posted today.

Sources

"The History of COLA," U.S. Social Security Administration. undated Web page. Accessed 11 Sep 2009.

"Social Security Announces 5.8 Percent Benefit Increase for 2009" press release. U.S. Social Security Administration. 16 Oct 2008.

"Cost-of-Living Adjustment Must Be Greater Than Zero," U.S. Social Security Administration. Web page accessed 11 Sep 2009.

"Status of the Social Security and Medicare Programs; A SUMMARY OF THE 2009 ANNUAL REPORTS; Social Security and Medicare Boards of Trustees," U.S. Social Security Administration. 12 May 2009.

Barry, Patricia "Part B Premiums in 2010: Frozen for Many, Higher for Some: No Social Security cost-of-living increase next year means higher costs for some beneficiaries and states." AARP Bulletin Today 7 May 2009.