For only the third time in 40 years, millions of Social Security recipients, disabled veterans and federal retirees can expect no increase in benefits next year – which is unwelcome news for more than one-fifth of the nation’s population.
They can blame low gas prices as a big reason why. By law, the annual cost-of-living adjustment, or “COLA,” is based on a government measure of inflation, which is being dragged down by lower prices at the pump, among other things.
The government is scheduled to announce the 2016 COLA – or lack of one – later today based on this morning’s Consumer Price Index for September, which came in at -0.2%. The pre-report consensus was for a drop of -0.2% last month.
With inflation so low this year, most forecasters believe there is little chance that there will be a COLA benefit increase for next year. Prices actually have dropped from a year ago, according to the inflation measure used for the COLA. We’ll find out later today.
“It’s a very high probability that it [2016 COLA] will be zero,” said economist Polina Vlasenko, a research fellow at the American Institute for Economic Research. “Other prices – other than energy – would have to jump. It would have to be a very sizable increase that would be visible, and I don’t think that’s happened.”
Congress enacted automatic annual increases for Social Security beneficiaries in 1975, when inflation was high and there was a lot of pressure to regularly raise benefits. Since then, COLA increases have averaged 4% a year.
By law, the cost-of-living adjustment is based on the Consumer Price Index for Urban Wage Earners and Clerical Workers, or CPI-W, a broad measure of consumer prices generated by the Bureau of Labor Statistics. It measures price changes for food, housing, clothing, transportation, energy, medical care, recreation and education.
The COLA is calculated by comparing consumer prices in July, August and September each year with prices in the same three months from the previous year. If prices go up, benefits go up. If prices drop or stay flat, benefits stay the same.
The numbers for July and August show that, overall, consumer prices have fallen since the same period last year. Fuel prices are down by 23% from a year ago, according to the August inflation report. But prices for some other goods and services, such as healthcare and housing, are up.
Advocates argue that the government’s measure of inflation doesn’t accurately reflect price increases in the goods and services that older Americans use. “The COLA is determined by the buying power of younger working adults,” said Mary Johnson of the Senior Citizens League.
Many advocates for seniors want Congress to adopt an experimental price index that seeks to capture the inflation experienced by Americans 62 and older. The Social Security Administration estimates it would increase the annual COLA by only an average of 0.2 percentage points – which still might not be enough to generate a COLA increase for next year.
Only twice before, in 2010 and 2011, have there been no increases. In all, the COLA affects payments to more than 70 million Americans. Almost 60 million retirees, disabled workers, spouses and children get Social Security benefits. The average monthly payment is $1,224.
The COLA also affects benefits for about 4 million disabled veterans, 2.5 million federal retirees and their survivors, and more than 8 million people who get Supplemental Security Income (SSI), the disability program for the poor. Many people who get SSI also receive Social Security.
And there’s more bad news: The lack of a COLA increase means that older people could face higher health care costs. Most have their Medicare Part B premiums for outpatient care deducted directly from their Social Security payments, and the annual cost-of-living increase is usually enough to cover any rise in premiums.
When that doesn’t happen, a long-standing federal “hold harmless” law protects the majority of beneficiaries from having their Social Security payments reduced. In this case, we’re not talking about a reduction in benefit payments, but rather no annual increase. Again, this has happened only two other times in the last 40 years.
Expect to see a lot more discussion on this issue after today’s COLA announcement. I will be surprised if President Obama doesn’t take this opportunity to rail on the current system and argue for sweeping changes to make sure the COLA goes up every year.
What else is new?
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