Retire Smart: Why Social Security Payments Will Be Flat in 2011, and What It Means for Seniors
Sunday, November 21, 2010

By Mark Miller
Tribune Media Services

For the second consecutive year, seniors won't get a Social Security cost-of-living raise in 2011. Although the news comes as no surprise, many seniors are angry. But is their anger justified?

I believe strongly in the importance of Social Security; it keeps millions of seniors out of poverty and provides critical longevity risk insurance - that is the risk of outliving your money. If anything, Social Security benefits should be beefed up in the years ahead, not reduced.

But there's nothing inequitable about keeping Social Security payments at current levels next year. That's because seniors are still enjoying a huge raise in 2009 Social Security payments that was based on an economic fluke.

Social Security has had an automatic annual cost-of-living adjustment feature (COLA) since 1975, which is determined by the third quarter Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). In the third quarter of 2008 - just before the economy crashed - the CPI-W spiked temporarily, the result of a big increase in energy prices.

The result was a whopping 5.8 percent boost in Social Security benefits for 2009 - a raise that was especially generous considering the near-absence of inflation in the post-crash economy. Seniors on Social Security or disability benefits also received a one-time payment of $250 under the 2009 economic stimulus law.

Social Security payments can't fall under federal law, so benefits were held level in 2010, and will continue that way until the CPI numbers exceed the 2008 CPI-W index level. The recent final third-quarter CPI report determines, officially, that payments will stay steady again in 2011.

"Although some beneficiaries feel they are being treated unfairly, that's not correct," says Alicia Munnell, director of the Center for Retirement Research at Boston College and one of the nation's top experts on Social Security. "The cost of living, as measured by the CPI, is still lower than it was in the third quarter of 2008. In fact, most beneficiaries come out a little bit ahead because the real value of their benefits increased for a while."

Some argue that the Social Security COLA shouldn't be driven by the CPI-W, because it is vulnerable to drastic spikes and doesn't properly measure prices that impact seniors disproportionately, such as health care. The critics may have a case, but the 2009 windfall is in the history books and it's the relevant data point today.

Moreover, if the CPI-W formula really is a problem, Congress is free to change it. Instead, lawmakers have put a bandage on the controversy by approving one-time cash payments like the one issued in 2009; President Obama is backing the idea of making a similar payment for 2011, at a cost of about $12 billion.

How about health-care inflation? It's important to remember that seniors are protected under the Social Security Act from increases in one of their most significant health-care expenditures - the Medicare Part B premium (which covers doctors and other medical providers).

That law prohibits an increase in the Part B premiums in years where the Social Security COLA is too small to cover it; the only exceptions are high-earning seniors with modified adjusted gross income more than $85,000 (single), or $170,000 (married couples). About three-quarters of seniors are covered by this hold-harmless provision, according to the Kaiser Family Foundation.

Meanwhile, premiums for Medicare Advantage managed care programs are expected to dip 1 percent next year on average, according to the federal Centers for Medicare & Medicaid Services (CMS), which administers Medicare.

CMS says the average monthly premium for Medicare prescription drug plans will rise 3 percent, although some of the largest plans are implementing larger price hikes. Seniors can shop these plans during the annual enrollment period from Nov. 15 to Dec. 31, and should have ample opportunities to find plans with competitive prices.

It's also important to consider the Social Security COLA in the context of our broader economic woes.

The political impulse to placate seniors comes at a time when older Americans are faring better - on a relative basis - than any other age group in the country. The U.S. Census Bureau reported recently that the poverty rate for Americans over 65 actually fell last year (from 9.7 percent to 8.9 percent), while it rose sharply for the population as a whole to 14.3 percent. That's the highest rate since 1994. Forty-four million Americans were below the official poverty line, and one out of every five children was considered poor.

Sorry, but adding to our ballooning federal deficit just to make a one-time Social Security COLA payment just doesn't make sense.

Mark Miller is the author of "The Hard Times Guide to Retirement Security: Practical Strategies for Money, Work and Living" (John Wiley & Sons/Bloomberg Press, June 2010). He publishes, featured recently in Money Magazine as one of the best retirement planning sites on the Web.

This column was printed in the November 21, 2010 - December 4, 2010 edition.


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