Cost-of-living increases for Social Security had become so routine over the past several decades that it set off outrage when news spread that for the second year in a row, there would be no increase in January. On Thursday, Speaker of the House Nancy Pelosi tried to calm the waters by announcing that the House would vote on a bill to provide $250 each to Social Security recipients.
We won’t get into the politics of this latest move, or the likelihood of such a bill passing. But it seems like a good time to look at how COLAs came into use in the first place, and how they have changed over time.
The original Social Security Act of 1935 made no provision for COLAs. Nor was there one for 15 years after passage of the Act. It was only in 1950, 10 years after the first benefits were paid under formulas set in 1935, that Congress passed legislation to increase benefits.
That 70 percent increase was less than the 76 percent increase in the general Consumer Price Index over the same period. But the next two increases mandated by Congress, in 1952 and 1954, were well above general price rises. The increases continued every few years, and the upshot of the whole process was that with the 10 percent increase that took effect in January 1971, benefits were 3.7 times as high as stipulated in 1935 even though consumer prices had only increased by a factor of 2.9. The real buying power of benefits had increased by about a fourth.
In 1972 a bidding war between President Richard Nixon and powerful Democratic Congressman Wilbur Mills resulted in a dramatic increase of 20 percent. The 1972 law also provided for automatic increases to start in 1975, tied to the CPI. Moreover, there were interim increases so that, with the first automatic increase in 1975, inflation adjusted benefits stood 38 percent above original levels.
Although most recipients thought they were barely keeping up with prices during the high-inflation 1970s, the benefit increase from February 1968 to June 1975, at 82 percent, was well above accumulated inflation of 57 percent.
Since 1975, real benefits have been flat in terms of prices measured by the CPI. The 1975 legislative change was two-edged.
Benefits would adjust each year, but unlike the first 35 years, Congress had a good excuse for not increasing benefits above that.
One consequence of benefits rising faster than general prices in those first four decades, while FICA contribution rates and applicable earnings ceilings remained low, was that many recipients in the 1975-1995 period received an enormous “return” on what they had paid in. (As recently as 1965, the maximum FICA payable, employer and employee combined, for Old Age, Survivors and Disability Insurance, was only $348 per year.) In his 1993 book, “Facing Up,” Peter G. Peterson, who had been Commerce Secretary in the Nixon Administration, wrote that, “Most currently retired Americans receive Social Security benefits that are two to five times greater than the actuarial value of prior contributions by both employer and employee.”
That is less true now, as the cohort of people who paid trifling amounts in FICA taxes from the 1940s into the 1960s is dying off.
But when one takes into account what it would have cost to buy private disability and life insurance that provided protection equal to the disability and survivors’ components of Social Security, the retirement benefits are a pretty good deal for most people.
Because of the way Social Security benefits are computed — 90 percent of the first $761 of “average indexed monthly earnings” and 32 percent of everything from $761 through $4,586, but only 15 percent of anything over that last amount — lower-income people get a substantially higher fraction of their pre-retirement earnings than do higher-income individuals and a much higher “return” on the taxes they paid. But nearly all are convinced they are only getting their own money back.
Those who complain about no COLA for 2011 generally did not express much appreciation for the 5.6 percent bump they got in 2008. Much of that was due to 2008’s high energy prices that make up a smaller fraction of household spending for seniors than for the general populace. But now that these prices have fallen, seniors concentrate on items that they know went up. This is not unique to them; virtually all people pay attention to price increases but ignore items with stable or falling prices. And so there are charges of unfairness, often by the people who are doing the best in relative terms under the program.
To be sure, many of the 58 million retirees and disabled Americans who receive Social Security are highly dependent on their monthly payment.
For more than half of all retirees, it constitutes the majority of their income and for a third it makes up more than 90 percent.
Another issue is that the specific variant of the CPI used understates the increase in costs of the specific items that retirees need to buy, especially medical care and drugs. That is true, although the fact that Medicare picks up a substantial part of health costs for these age cohorts means that the increase in the medical component of the general CPI is not a good measure of cost increases for the out-of-pocket items Medicare beneficiaries must pay.
It also ignores the fact that the enactment of Part D, the drug benefit component of Medicare, represented a huge increase in public funds flowing to retirees, one for which they had paid nothing during their working years and that largely comes from younger workers.
But that is a subject for another column.
© 2010 Edward Lotterman
Chanarambie Consulting, Inc.