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By Stan Hinden | November 2009
You never miss the water 'till the well runs dry.
That bit of rural wisdom aptly describes the fuss that's been stirred up in Washington and across the country by news that Social Security recipients won't receive their annual cost-of-living adjustment (COLA) in January 2010. The reason: A sharp drop in the Consumer Price Index (CPI) from last year to this year.
In fact, Social Security trustees predict, there won't be a COLA in 2011, either. The next cost-of-living increase, they said, will probably take place in 2012.
This news has been a real shocker in the retiree community because 2010 will be the first time in 35 years that there's been no cost-of-living increase for people receiving Social Security benefits.
President Obama responded by calling for Congress to approve a $250 payment next year for 57 million seniors, veterans and people with disabilities. Included are 49 million Social Security beneficiaries and 5 million people receiving Supplemental Security Income (SSI). A similar $250 payment was made last May.
The new payment, the White House said, would be equivalent to a 2 percent increase in benefits for the average Social Security beneficiary.
Even before Obama's request, several members of Congress introduced bills to provide all retirees with an emergency 3 percent COLA or with a $150 to $250 special payment. The legislators said seniors needed the money to deal with rising health care costs.
The automatic annual COLAs began in 1975 and, thanks to steadily rising prices, there have been increases in Social Security payments every year since then. Over the decades, the COLAs have averaged 4.43 percent.1
The size of each COLA is based on the change in the Consumer Price Index (CPI) from the third quarter (July to September) of the past year to the third quarter of the current year. Until this year, the CPI has always risen.2
Then came 2008, the year in which oil prices soared to $147 a barrel3 and motorists paid $4 a gallon for gasoline4.
That caused a spike in the 2008 CPI. The effect was to boost the 2009 Social Security increase by 5.8 percent. It was the biggest increase in 26 years.5
Naturally, those of us on Social Security were delighted by the 5.8 percent increase. Little did we know that the good news was but temporary.
This year, as the prices of crude oil and gasoline declined, the CPI for the third quarter of 2009 was considerably lower than the third quarter of 2008. That meant no COLA.6
But did that mean there would be a decline in Social Security benefits?
The answer was "no" because the law says that a COLA can only go up-not down.
That's a good thing, said Stephen C. Goss, chief actuary at the Social Security Administration. He explained:
"If we really didn't have the restriction that a COLA can only be an increase, we would have a drop in benefit levels of 2.7 percent. That doesn't happen per the law. We can only have an increase, so that means zero."
"Actually," he added, "I guess zero is kind of a good deal compared to cutting benefits by 2.7 percent."
Goss spoke at a Washington forum sponsored by the AARP Public Policy Institute. The meeting was called to discuss the impact that a year without a COLA could have on various aspects of Social Security and Medicare.
In fact, when there is no Social Security COLA and monthly benefits are frozen, several other important numbers do not change, either.
They include the maximum amount of wages which are subject to Social Security payroll taxes. They will be frozen at the 2009 level of $106,800.7
In addition, $14,160 will remain the amount of money that can be earned by workers on Social Security, who are below full retirement age. If they earn more, they will temporarily lose part of their Social Security payments.8
The Social Security COLA also has a significant connection to Medicare's Part B program, which pays for doctors' visits, medical tests and equipment.
Along with millions of retirees, my wife, Sara, and I have our monthly Part B Medicare premiums deducted from our monthly Social Security payments. The premium this year is $96.40 a month. The premium goes up almost every year.
But it won't go up in 2010 for most enrollees in Medicare Part B. Social Security law contains a "hold harmless" provision, which says that Part B Medicare premiums cannot rise higher than the year's Social Security COLA. So a zero COLA means that the premium will stay at $96.40 in 2010-at least for most people.
The "hold harmless" rule protects about 73 percent of Medicare beneficiaries from any increase in the Part B premium. The other 27 percent who are not protected are in these four groups:9
People who do not have their Medicare Part B premiums deducted from their Social Security payments.
People who pay more than the standard monthly Part B premium of $96.40 because of their high incomes.
People who are newly-enrolled in Medicare Part B.
People with low incomes who qualify for both Medicare and Medicaid, a state-federal insurance program. For these folks, the states will pay any increase.
People who are not protected by the "hold harmless" rule could face an estimated increase from $96.40 to $119 a month in 2010, according to the Congressional Budget Office (CBO).10
But many members of Congress are trying to prevent that from happening. By a vote of 406-to-18, the House voted to prevent any premium increases for Medicare Part B. The Senate is expected to consider the issue soon.
However, there is no "hold harmless" rule to protect retirees who are enrolled in the Medicare Part D Prescription Drug Program. They, too, have their Part D premiums deducted from their Social Security payments.
According to a recent study by the Kaiser Family Foundation, the average monthly premium for stand-alone drug plans in 2010 will be $38.85, assuming enrollees remain in their 2009 plans. That would be a 10.7 percent increase over the 2009 average premium of $35.09.
Undoubtedly, the lack of Social Security COLAs in 2010 and 2011-and the reverberations-will cause Washington policy-makers to take a closer look at why the CPI works the way it works. Changes may be coming.
Copyright 2009, Stan Hinden. All rights reserved. Reprint permission required.
The author was compensated for writing this article by AARP Financial.
