V I E W P O I N T

Seniors Brace for another year with a Zero Cost-of-Living Adjustment (COLA)

With inflation remaining in check during the past year, the Social Security Administration will soon announce, for the second year running, that seniors will not see a cost-of-living increase in their Social Security checks. 2011 will be the second year with NO automatic COLA since benefits began to be automatically adjusted for inflation in 1975.

The millions of seniors represented by the National Committee to Preserve Social Security and Medicare urge the Congress to take swift action to help seniors deal with the harmful effects of a second year with NO Social Security COLA.

How the COLA Works

The Social Security Act provides that Social Security benefits increase automatically each year if there is an increase in the Bureau of Labor Statistics' Consumer Price Index for Urban Wage Earners and Clerical Workers (known as the CPI-W).

The increase is calculated by comparing prices from the third quarter of the last year to the third quarter of the current year. However, because there was no COLA in 2010, the starting point for determining the COLA for 2011 remains the third quarter of 2008. Due to the recession and related general declines in consumer prices, the CPI is still below its level for that year.

Seniors Are Harmed by Rising Health Care Costs

Despite a relatively low rate of general inflation, health costs continue to rise rapidly, and the elderly, who are living on fixed incomes, spend a significantly larger share of their income on health costs than does the general population. According to the Medicare Trustees, Medicare costs have risen significantly in recent years. Currently, Social Security beneficiaries spend on average nearly 30 percent of their benefits on Medicare Part B and Part D out-of-pocket expenses, a figure that is projected to rise to 50 percent by 2080.

Congress Needs to Act Now

As stated earlier, 2010 was the first time in decades that Social Security beneficiaries didn't get a COLA.

Seniors can't afford to lose another year's COLA without some additional help. There are bills that have been introduced in the Congress to authorize a payment to all Social Security beneficiaries of $250, and the National Committee urges the Congress to move quickly to enact legislation that would allow these payments to be made.

But More Needs to be Done in the Future

While a $250 payment would help seniors meet the financial difficulties related to another zero COLA, it would be only a partial solution. A better approach would be to base future Social Security COLAs on a price index that specifically measures the effect of inflation on the elderly rather than relying on the current index, which measures inflation on urban workers.

The government currently maintains such an index, known as the Consumer Price Index for the Elderly, or CPI-E. Not surprisingly, the CPI-E shows that inflation for the elderly runs higher than it does for the general population. We believe that this index, crafted as it is to accurately gauge the effect of inflation on purchasing decisions made by the elderly, should be the index used to adjust Social Security benefits.

Conclusion

The National Committee strongly urges the Congress to take immediate legislative action to ensure that Social Security beneficiaries receive a $250 payment to help offset the effects of another year with no COLA. In addition, it urges the Congress to use the CPI-E in making future inflation adjustments to Social Security benefit levels.

Government Relations and Policy Department, October 2010