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It’s Back: Goodies for Granny In Lieu of the COLA

October 15th, 2010 . by economistmom

cpi-w-2008-to-2010-bls

The Social Security Administration announced today that for the second year in a row there would be no cost-of-living increase in Social Security benefits for 2011.  Why not?  As the SSA explains, this is a straightforward, non-political determination based on historical economic data:

The Social Security Act provides for an automatic increase in Social Security and SSI benefits if there is an increase in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) from the third quarter of the last year a cost-of-living adjustment (COLA) was determined to the third quarter of the current year.

So very objectively, there will be no cost-of-living increase in Social Security benefits in 2011 because there was no increase in the cost of living, as measured by the CPI-W, from the 3rd quarter of 2008 (the last time a COLA was triggered, for 2009 benefits) to the 3rd quarter of 2010 (which determines the COLA for 2011 benefits).  The chart above comes from the Bureau of Labor Statistics and shows the CPI-W, by level (seasonally adjusted), from January 2008 to September 2010.  Note that in September 2008, the CPI-W was 215.111; in September 2010, it was 214.345 (lower).

Well, no matter.  Last year at this time, when the CPI in September 2009 came in even lower (note the data point in the chart), the President and members of Congress called for $250 checks for seniors to make up for the lack of a COLA.  Policymakers downplayed the fact that there was no need to compensate seniors for (the lack of) inflation, and played up the fact that there was still very apparent need for continued economic stimulus.  Most policy observers like me who are not politicians commented at the time that the biggest reason for the $250-check-for-lack-of-COLA proposal was that it was good pandering to seniors.  I also remarked that maybe it wasn’t such bad stimulus, but I could think of better, and anyway, it had nothing to do with the non-COLA other than the non-COLA being a convenient way to get seniors riled up and especially receptive to the politicians’ pandering.

Well, the $250 non-COLA bonus never passed last year, but good-for-politics ideas like that tend to resurface regularly. And this year is even a better year for it.  Prices are still low but have come up since last year (but are still lower than two years ago which the current levels of Social Security benefits are based on), and to top it all off, this year is an election year!  The Ways and Means Committee’s Social Security chairman, Earl Pomeroy, has announced the House will take up the $250 bonus proposal in November.  The President has announced his support for the same.  House Speaker Pelosi calls this a “fiscally responsible” proposal, and maybe she’d even consider proposals for double the cost to be so.  (A bidding war may be coming in the final days leading up to the election.)

So my opinion about this proposal hasn’t really changed qualitatively since last year, when I said (in the Washington Post “Topic A” feature) that:

This is not about making seniors “whole.” Because seniors are guaranteed to receive Social Security benefits regardless of the strength or weakness of the economy, they more than others have had a significant part of their income protected in this recession, and they received special aid in the last stimulus package, too. This is about taking from one generation and giving to another. By choosing to finance the provision by borrowing, our politicians hope the beneficiaries (seniors) will notice — while those most heavily penalized (our kids and grandkids) are thankfully not old enough to vote. This seems to be a purely political strategy to pander to seniors (once again) over other groups.

…but maybe quantitatively, I’m a little sicker of hearing it this second time around.

25 Responses to “It’s Back: Goodies for Granny In Lieu of the COLA”

  1. comment number 1 by: Gipper

    Economistmom,

    Don’t get upset. Get a policy change……..

    More evidence for phasing in the disbanding of the open-ended defined benefit pension structure of Social Security.

    SS recipients have this dogged conviction that they’re only getting back what they paid in. I say that we make it explicit by creating a defined contribution structure where SS taxes go into fund comprised of US Treasuries. Each taxpayer would accumulate shares in the US Treasury Mutual Fund (USTMF). The contributions and earnings become the SS fund.

    Advantages:
    Recipients only earn what they contribute
    No open-ended liability for taxpayers
    Saftey of US Treasuries
    Same cashflow as current system in short-run
    Caps outgoing cashflow in long-run

    Essentially, the USTMF converts an implicit liability of future SS payouts into an explicit liability in the form of publicly-held debt. During taxpayers’ pre-retirement accumulation phase, the accrued interest expense is credited to their account, but is not paid out in cash until retirement age is reached and funds are withdrawn.

    Add the usual safeguards to ensure people withdraw funds from USTMF according to expected lifespan. Add bonus that, at death, unused portion of account could be passed on to heirs.

  2. comment number 2 by: spencer

    I hate to tell you gipper, but social security is a defined benefit program. Each individuals benefits are a function of their life time earnings and social security contributions.

    Moreover, for decades the social security surplus has been going into US treasuries.

  3. comment number 3 by: Arne

    In order for the STTMF to be able to pay interest, it would need to invest that money somewhere. Where would you have it go?

  4. comment number 4 by: Arne

    STTMF should have been USTMF.

  5. comment number 5 by: Fred

    The government significantly understates inflation. http://www.shadowstats.com/article/consumer_price_index. Adjusting the CPI to bring lower numbers is a way to cut benefits and wages for laborers.

    One way to garner money for SS is simply to fund it through taxes. Or simply stop spending so much money on our overseas wars and lucrative defense contracts.

  6. comment number 6 by: Brooks

    I hope the guys who think Diane doesn’t care much about the spending side catch this post.

  7. comment number 7 by: artfullcodger

    I am a disabled senior citizen who just finished battling for my neighbors against a tax credit low income landlord who campaigned for a 3 percent increase in rents in spite of our income being frozen at 2009 levels. Our benefits range from four hundred to about 11 hundred per month. We pay rent, Medicare, utilities, phone, food and for some of us with cars, still try to buy gas. Social Security Trust fund monies can legally be used for “defense” and the Bush administration directed accountants to make a case for running out of money while they enjoyed the fund cushion for the Iraq war. I have diabetic friends who eat pasta to make ends meet. I have other friends in their eighties who had to drop their Medicare Advantage plans because they no longer could pay for the policies. I eat peanut butter and jelly sandwiches two weeks out of four so I can buy gas. This blogger is so far out in left field that he should have grass growing in his wall street brogans.

  8. comment number 8 by: Gipper

    Spencer, Arne,

    Think of converting SS into a 401(k) plan where you can only invest in Treasuries. That’s what I’m proposing. The current defined benefit program structure is the problem. That’s why I’m arguing to change it to a defined contribution plan.

    Just because SS benefits are based on your earnings, doesn’t mean guarantee that the PV of SS payouts will be equal to the SS contributions made during your working life. Defined contribution structure solves that problem.

    The Social Security Surplus has not been going into publicly held US Treasuries. They go into US Debt held by the US Government. Hmmmmm. That doesn’t sound much like real debt, now does it?

    OK, the mechanics of “paying” interest. Here’s how it works. Treasury purchases debt on open market and puts into USTMF. Debt earns interest, but Treasury doesn’t add cash into the fund. Instead, like all mutual funds, it computes a NAV (net asset value) for an individual’s shares, and then adds additional shares to his account equal in value to the value of the interest earned. Essentially, this represents an additional liability for the Treasury. It’s an accrued expense, but not a cash expense drawing current revenue from the budget.

    Once an individual retiires, he has accumulated a number of shares in the USTMF based on the tax contributions plus interest earnings. Those shares have an NAV.

    Once the individual begins withdrawing funds (at a minimum retirement age, and in amounts ensuring he doesn’t outlive his savings), he redeems the shares for cash. Essentially, he’s redeeming his Treasury holdings for cash. That’s the time when the budget is affected.

  9. comment number 9 by: Markistleaning

    i say we can the whole system..any system where hard working people that provide lifes necessities for us all..actually go hungry themself..while actors and ballplayers reap everybody’s harvest..is an evil system.

  10. comment number 10 by: Markistleaning

    i agree marksistleaning it is high time we evaluate a different way of dividing up the harvest

  11. comment number 11 by: Arne

    “That doesn’t sound much like real debt, now does it?”
    As long as it gets paid it is real debt.

    “Treasury purchases debt on open market and puts into USTMF. ”
    How much debt woudl that be?

  12. comment number 12 by: Rodney Hytonen

    With electricity ALONE in a tiny retirement bungalow seeing increases of 50-100% every year, (think, a doubling of your monthly bill, documentable in WV) $250 is not only an INSULT,

    but a guarantee that any future COLA will be an actual REDUCTION in income -

    because future COLA’s will not take the (now missing) $250 into account as part of the base.

  13. comment number 13 by: Gipper

    Artfullcodger, markistleaning, and your sockpuppeteer:

    Go get a welfare program to solve your problems. SS is a retirement program. It should be based on what you contributed over your working life.

    If you need a handout, then be honest and ask for one. Don’t pretend you’re owed something for money you never earned.

    BTW, my daughter eats peanut butter and jelly sandwiches 2 weeks out of four, and I don’t eat any meat, fish, or poultry. You can survive just fine without your Porterhouse and hamburgers.

    And Arne, 99% of the taxpayers would prefer to own a Treasury Bond in their own name where it is a legally enforceable contract. Treasuries in a trust fund are for chumps.

  14. comment number 14 by: Jim Glass

    The Wisconsin Feingold-Johnson campaign commercials on Social Security, via Andrew Biggs.

  15. comment number 15 by: Jim

    Gipper says: SS is a retirement program. It should be based on what you contributed over your working life.
    -
    Actually, it is an insurance program - Old-Age and Survivors Insurance - http://www.ssa.gov/OACT/ProgData/describeoasi.html

    Surviving spouses who have never worked nor contributed receive survivor benefit payments Those born with disabilities and who have never worked are likely eligible for SSI - Disability Payments; those who have worked and contributed who become disabled can apply for SSDI - disability payments; if a parent who works and contributes dies, children with certain restrictions will receive survivor benefit payments generally until 18/completing high school.

  16. comment number 16 by: Gipper

    Jim,

    I don’t think Russ Feingold could say much in opposition to my proposal. It’s not privatization. So what is he going to say, SS should be a welfare program to subsidize seniors beyond their actual contributions plus Treasury yields?

    The beauty of th USTMF is that it calls out all those boastful AARPsters who claim they’re entitled to what they paid in. Well, this proposal gives taxpayers what you paid in plus interest from Uncle Sam. Bluff called.

    You can bet that after 10 years of the USTMF, you will have a groundswell of political outrage arguing for private investment options when taxpayers see the awful yields they get on their “safe” Treasury funds. Then everything will be on the table.

  17. comment number 17 by: Gipper

    Jim,

    I understand the Old Age Insurance concept. That’s why SS is structured as a defined benefit plan. However, if the owner of a USTMF account is entitled to pass on his shares to his heirs, then you preserve the survivor benefit attributes of OASI. The difference is that the survivor benefits are based on what the bread-winner paid in so there is a limit to the support.

    The open-ended nature of OASI is what has gotten us into this fiscal mess. The Ponzi scheme is the inevitable outcome.

  18. comment number 18 by: Phil

    Pandering to granny, indeed. As a retiree from the armed forces, my defined benefit retirement system is also based on the same COLA computation. Where is the outcry for my $250??

  19. comment number 19 by: Jim

    Gipper replied: I understand the Old Age Insurance concept. That’s why SS is structured as a defined benefit plan. However, if the owner of a USTMF account is entitled to pass on his shares to his heirs, then you preserve the survivor benefit attributes of OASI
    -
    Unfortunately, not all of us are able to work productively until the now full SS retirement age of 66 or 67. Some of us die or become disabled at 40 with minor children. Or give birth to disabled children who may have no lifetime earnings at all.

    For those, am not sure the accumulated personal fund value for them would fully last to cover current lifetime needs, let alone be there for any heirs.

    For those who do not want to have a larger government, can only imaging the costs to administer individual ‘accounts’ with unique assets for over 300 million persons now and rising by the day. Add in divorces, remarriages: hmmmm ….

    For certain, plans like you are proposing MUST BE considered, along with all of their attendent issues and costs that are not fully included nor addressed now.

  20. comment number 20 by: Gipper

    Jim,

    Have welfare programs for welfare problems like disabled children. I am saying, “Don’t use SS as a welfare program.” Life insurance exists to solve the problem of someone dying at age 40 leaving dependents behind.

    As for the costs of administering individual accounts, it wouldn’t be nearly as difficult as a private mutual fund with multiple asset classes. Everyone in the USTMF has the same assets. All you have to track are the contributions and the interest earnings. No stock splits, dividends, capital gains taxes, corporate taxes, etc. to keep track of.

    I don’t see that there’s any significant incremental cost over what the SSA keeps track of today regarding divorces, remarriages, and tracking earnings histories for individuals. For one thing, we won’t have to worry about sending checks to dead people under the USTMF.

    You have not spelled out what is so unique and difficult about the USTMF beyond what the SSA does today that requires special consideration of issues and costs.

  21. comment number 21 by: AMTbuff

    From the progressive point of view, the genius of SS was its inclusion of middle-class beneficiaries in what would otherwise have been regarded as a welfare program. This was done to maximize its political support. When SS changed from fully funded to Ponzi, over FDR’s objections, political support was further assured, as was the future loss of that support when the Ponzi structure became apparent to all.

    Progressives will resist separating the welfare functions, but they haven’t yet grasped that a collapsing Ponzi game in which the middle class or working age are all losers has no natural political support.

  22. comment number 22 by: STDog

    Gipper:
    Have welfare programs for welfare problems like disabled children. I am saying, “Don’t use SS as a welfare program.” Life insurance exists to solve the problem of someone dying at age 40 leaving dependents behind.
    -

    100% agreement on that.

    SS went form safety net to sole retirement plan to full blown welfare program. Medicare just adds another welfare program to the mix.

  23. comment number 23 by: Jim Glass

    the House will take up the $250 bonus proposal in November. The President has announced his support for the same. House Speaker Pelosi calls this a “fiscally responsible” proposal, and maybe she’d even consider proposals for double the cost to be so. (A bidding war may be coming in the final days leading up to the election.)

    Let’s hope this is just pre-election posing for the benefit of the senior vote.

    If they can’t avoid getting into a bidding war to give away the most money even over an excuse like this we are all truly fiscally doomed. We might as well start buying gold and burying it in our back yards. And loading up the ammo to protect it.

  24. comment number 24 by: Jim Glass

    When SS changed from fully funded to Ponzi, over FDR’s objections, political support was further assured, as was the future loss of that support when the Ponzi structure became apparent to all.

    Exactly so.

    Progressives …haven’t yet grasped that a collapsing Ponzi game in which the middle class or working age are all losers has no natural political support.

    The four stages of Social Security’s life cycle, past and future:

    1) Created 1935. FDR sells SS to the public as a sound retirement program providing participants a “fair return” (the bond rate) on contributions, that is “actuarily sound and out of the Treasury forever” — after insisting it be designed to not place any burden on future generations (*no* inter-generational transfer!). SS is funded, and each annual cohort gets the return on T-bonds on its contributions — that original plan could still be running OK today.

    (If Reagan was too willing to raise taxes to be a 2010 Republican, FDR was far too concerned about actuarial soundness to a 2010 Democrat … or Republican.)

    2) 1939-1982. As soon as payroll-tax cash flow starts coming in, SS is reworked by Congress — over FDR’s veto — boosting benefits and slashing its tax rate to give then-participants much more than they contribtued. Ida May Fuller gets $22,900 on $24.75.

    SS’s supporters now sell it to the public by saying it is better than private retirement programs because it gives everyone far more than they contribute, and explicitly because is not actuarially sound:

    The beauty of social insurance is that it is actuarially unsound. Everyone who reaches retirement age is given benefit privileges that far exceed anything he has paid in — exceed his payments by more than ten times (or five times counting employer payments)!…

    Social Security is squarely based on what has been called the eight wonder of the world — compound interest. A growing nation is the greatest Ponzi game ever contrived.
    –Paul Samuelson, Newsweek, 1967

    Early participants collect from it $15 trillion more than they contribute.

    3) 1983 to today. SS goes broke, just as FDR’s people predicted it would when trying to uphold his veto of its change to paygo — the down side of “actuarially unsound” and “Ponzi game”.

    In 1983, to protect the benefits of then-seniors, Congress raises the tax rate to 12.4% ( then-seniors had paid as little as 3%) and slashes the benefits of then-young workers. As a result, the then-young (today’s middle agers) and younger will get back less than they contribute — ultimately $15 trillion less.

    Today, SS’s supporters can’t sell it to the public as giving people back even what they contribute, much less more. And they can’t sell as any kind of attractive retirement plan that makes people poorer over their lifetime.

    Thus they’ve changed their tack and now sell SS as “insurance”. DeLong and Thoma compare it to fire insurance — you don’t expect to get back what you pay for fire insurance, do you? You don’t want to! Unless you have a fire, then you collect it and it saves you. Thusly, SS is insurance against poverty. You aren’t supposed to get back what you contribute into it, and never were! Just why Warren Buffett is collecting on his “insurance against poverty” exactly like all other seniors with a work record poor or not, on terms that seem remarkably like those of a defined benefit retirement plan remains unexplained.

    4) Today into the future. Participants receive back $15 trillion less than they pay in — a loss as big as the gain that made SS so popular in the past. A $30 trillion swing! The result of this on the future political popularity of SS is … ??? Would the generation of the 1940s have allowed their politicians to create a SS plan that made them all poorer on a lifetime basis? Will future generations allow the politicians to continue one? We shall see.

  25. comment number 25 by: Gipper

    Jim,

    Great historical perspective. Your posts are always keepers. Especially love the Paul Sammuelson quote.

    Do you remember his college text book? On the back inside cover, he had graphs showing the GNP of different countries. In one of his 1970 editions, I recall that he had the GNP of the Soviet Union surpassing the US sometime in the 1980s.

    Nobel Prize, with a high IQ, but not a real economist. Like Krugman, he was a political hack.