Does COLA freeze hurt Social Security recipients?

Hank Wehrly, right, smiles as his wife Stella Wehrly speaks during an interview at the St. Andrews Estates North retirement community, Monday, Oct. 11, 2010 in Boca Raton, Fla. Seniors prepared to cut back on everything from food to charitable donations to whiskey as the news spread Monday that they will have to wait until at least 2012 to see their Social Security checks increase. (AP Photo/Wilfredo Lee)

Seniors will remain ahead of the inflation curve despite a second straight year without an increase in their Social Security benefits.

Some seniors and their advocacy groups have raised the specter of millions of the elderly struggling to pay for food, utilities and health care under a benefit freeze. Struggle, many do, particularly those who rely on Social Security for most if not all of their income.

But beneficiaries received a whopping 5.8 percent cost-of-living increase in January 2009, when the actual cost of living had risen only a tiny fraction of 1 percent. In effect, they got a double boost.

This year marked the first time recipients have gone without a benefit increase since 1975, when Congress adopted a system of automatic increases based on the Consumer Price Index. The Social Security Administration is set to announce on Friday that there will again be no increase in 2011.

So is the government turning its back on the elderly — only a few weeks from an election, no less?

That’s hard to substantiate, given the fact that the last increase in the cost of living allowance, or COLA, in January 2009, was the biggest in 27 years

The big increase in 2009 was due to an economic anomaly. The Social Security Administration bases the cost-of-living increase for the coming year on the inflation rate during the third quarter — the months of July, August and September — of the current year.

The third quarter of 2008 was the summer of $4-a-gallon gasoline, jolting up the inflation rate and resulting in the higher COLA. When gasoline subsequently collapsed to below $2 a gallon, so did the overall inflation rate in 2009, to one-tenth of 1 percent for the year, the lowest since 1954.

There will be no increase in Social Security benefits until consumer prices surpass those measured in the third quarter of 2008, the last time a COLA was awarded. This year, the inflation index is still a little less than 1 percentage point below the 2008 level.

“Objectively speaking, they got an unusually generous increase” that year, said Gary Burtless, senior fellow in economic studies at the Brookings Institution.

Burtless said seniors have also been the beneficiaries of two stimulus packages. One measure, passed in February 2008 under President George W. Bush, included tax rebates that provided $300 even for seniors and others who did not earn enough to pay taxes.

Then, in the stimulus passed in the early days of President Barack Obama‘s administration, seniors were awarded $250 to help get them pay for prescription drugs.

With the average Social Security benefit about $1,072 a month, that $250 is about the same as a 2 percentage point COLA increase.

Such numbers are cold comfort to Marianne Cusumano, 81, of Kansas City, who relies solely on Social Security. “That makes it rough,” she said of the freeze. “Food, everything is going up. If you do have to eat out, prices in the restaurants are up.”

Jean DeBaare, also of Kansas City, said she lost half her income after her husband of 62 years died in August. “I don’t like what they are doing,” she said of the benefits freeze. “They are punishing people like me.”

What shouldn’t be forgotten, said David Certner, the AARP’s legislative policy director, is that “for older Americans that is a huge income source.” The Social Security Administration says that its checks are the primary source of income for 64 percent of retirees who got benefits in 2008, and a third relied on Social Security for at least 90 percent of their income.

Certner said a second straight year of frozen benefits comes as the elderly are seeing shrinking pensions, losses in their investments, negligible bank interest rates and retail prices for brand name drugs up 8.3 percent in 2009. “That’s why the COLA is so important to them.”

Kent Smetters, professor of insurance and risk management at the Wharton School of the University of Pennsylvania, said many people approaching or in retirement have taken a big hit because their hopes of living off their biggest asset, their homes, by downsizing to a smaller residence have been dashed by the dreadful housing market.

Moreover, a report by Fidelity Investments earlier this year estimated that a 65-year-old couple with Medicare coverage will still need $250,000 to cover health care expenses in retirement, up 4.2 percent from last year.

On the other hand, seniors have benefited in recent years from the 2003 Medicare prescription drug bill that reduced their health care costs.

And Jason Fichtner, a senior research fellow at George Mason University who served as deputy commissioner at the Social Security Administration, pointed to a “hold harmless” provision in law that protects some 93 percent of seniors from paying higher Medicare Part B premiums if they don’t get a Social Security COLA increase.

Seniors for the first time next year also get a 50 percent discount for brand-name drugs when they hit the “donut hole,” the gap in Medicare drug coverage under the 2003 law that is being phased out under the new health care law.

Fichtner stressed how important Social Security is in keeping the elderly out of poverty, and in that respect it appears to have been paying off. The poverty rate for those 65 and over fell to 8.9 percent in 2009, down from 9.7 percent a year earlier. This was the only age group that saw a decline in poverty.

But Congress is receptive to elderly voters, and one item that could be on the agenda when lawmakers return for a lame-duck session after the November election is a $250 payment to compensate people for going without a COLA increase next year.

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Online:

Social Security Administration: http://www.ssa.gov/

AARP: http://aarp.org

Copyright © 2010 The Associated Press

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7 Responses to "Does COLA freeze hurt Social Security recipients?"

  1. woody188  October 14, 2010 at 11:56 pm

    They are telling us younger folks we’ll get 75% of what they get now if we are lucky, and we won’t qualify for benefits until we hit 70 or 75. Get jerks like John McCain off Social Security and then maybe we can talk about COLA increases.

  2. b mcclellan  October 14, 2010 at 11:59 pm

    Unfair..

  3. b mcclellan  October 15, 2010 at 1:45 am

    As I glide indeterminately into my nether years Woody , yours and every generation to come will merge into the American experience or be steamrolled by globalism because my trade has been outsourced.

    At this age and in this day and age bean counters now have all reliability to be an overriding force over empathy.

    Pay in, you may get to extract. Eyes on who makes the deal. Good luck!

  4. Carl Nemo  October 15, 2010 at 2:17 am

    Nice to see you posting again Mr. McClellan… : )

    Carl Nemo **==

  5. bmclellan  October 15, 2010 at 2:00 pm

    Thanks Carl, every nut has to pop out of it’s shell at sometime or another, my turn…

  6. bogofree  October 15, 2010 at 6:25 pm

    I want you guys to keep on working and working to fund my cut of the Ponzi scheme. Back when SS was passed most of us were expected to pass by the time we were ready to cash in we would also be ready to cash out. Now we live longer so good for me and crappy for you. I started collecting at age 62 on the button figuring I’ll take what I can while I can.

    They can’t or won’t do it but there is regional differences in cost of living.

    Did government workers get a COLA this year? Did Congress?

    OK…time to wait for that fourth Wednesday of the month.

  7. Keith  October 15, 2010 at 10:26 pm

    Well, I’ll tell you that in the private sector, none of us got COLA’s. None. I haven’t had one in three years and with the value of the dollar going in the toilet, I’ve had to go hungry so my kids get enough to eat.

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