By Al Norman
For the second year in a row, millions of Social Security beneficiaries feel they got short-changed by the recently announced zero percent cost of living adjustment (COLA). They should be angry — because the COLA is improperly calibrated.
A 2003 study by economists at the Federal Reserve Bank of New York found that Social Security benefit levels for seniors would increase if benefits were adjusted for inflation using a price index that better reflects the spending patterns of the elderly, rather than those of workers.
Currently, the COLA is based on the increase in the Consumer Price Index for Clerical Workers (CPI-W), which is a Bureau of Labor Statistics (BLS) measure of price changes in the average set of goods purchased by workers.
But there are significant differences between the spending habits of the typical worker and the typical retiree. Seniors, for instance, devote a much larger share of their income to medical care and prescription drugs. Over the years, many advocacy groups have lobbied Congress to create a CPI-E — an index that would reflect spending by older Americans. Since the early 1980s, the BLS has actually calculated such an index — but it’s not something the public ever sees.
The Federal Reserve Bank study found that between 1984 and 2001, inflation as measured by the CPI-E was consistently higher than CPI-W inflation. If the CPI-E had been adopted in 1984, the average benefit by 2001 would have been nearly 4 percent higher, or roughly $408 more per year per recipient.
And that’s the reason Congress has never passed a CPI-E. The same study concluded that if we had a CPI-E in place, the Social Security Trust Fund would become insolvent five years sooner than the anticipated date of 2043 — which was the best estimate at the time.
There’s a simple solution: create a CPI-E that credits elders for a more accurate picture of their real cost of living, and at the same time, pay for it by removing the cap on income subject to the Social Security payroll tax. Social Security limits the amount of earnings subject to taxation for a given year. For earnings in 2009, 2010 and 2011, this maximum is $106,800. A worker earning $106,800 per year pays the same Social Security payroll tax as a hedge fund manager earning $106 million. Instead of nickel and diming retirees on the COLA, we should remove the cap on wages subject to the payroll tax.
Instead of a common sense approach like this, we get radical ideas like the one President George W. Bush floated in February 2005. Bush proposed replacing Social Security with “voluntary personal retirement accounts.” The president said, “We will make sure the money can only go into a conservative mix of bonds and stock funds … We will make sure there are good options to protect your investments from sudden market swings on the eve of your retirement.” That was before the ‘market swing’ of 2008, when millions of seniors lost a big chunk of their retirement savings invested in stocks and bonds. Privatizing Social Security is still on the table, despite Wall Street excesses.
The zero percent COLA announcement should serve as a stark reminder that retirees are falling farther and farther behind economically because Social Security uses an inappropriate measure for their inflation increase.
Clip this article and send it to your congressman. Tell him or her you want a CPI-E by removing the cap on Social Security taxable wages.
Al Norman is the executive director of Mass Home Care. He can be reached at 413-773-5555 x 2295, or at email@example.com. Archives of articles from previous issues can be read at www.fiftyplusadvocate.com.