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Retirees Will Receive a Cost-of-Living Adjustment

The big news in Washington yesterday was the announcement that retirees would not receive a cost-of-living-adjustment (COLA) for 2010.  The reason was the drop in the Consumer Price Index over the past twelve months. 

Because 2010 is an election year, President Obama and some Democrats in Congress propose sending each Social Security recipient a check for $250 to make up for the lack of COLA.  This will cost the federal government an additional $13 billion.  Rest assured, the president said the money would not come out of the Social Security “Trust Fund.”

In reality, retirees will receive a raise in their monthly benefit checks.  Because of the drop in overall prices and the fact the federal government will not reduce any retiree’s monthly Social Security check, each recipient will be able to purchase more goods and services next year.  In other words, the real value of their monthly payments increased due to the drop in prices.

Secondly, not to burst anyone’s bubble, but there is no Social Security Trust Fund.  The Social Security Administration (SSA) is required by law to “invest” any surplus in special U.S. Treasury bills.  In turn, the Treasury uses the money to pay for current government expenditures.  When it comes time for the SSA to redeem these special T-bills, they go the Treasury for payment.  The U.S. Treasury has four options to come up with the money:  raise taxes; cut spending in other areas of the budget; borrow the needed funds; or monetize the debt (i.e. create the money out of thin air). 

The average retiree receives $1,150 a month.  Had the CPI rose (instead of fallen) by the long-term average of 2.5% the COLA would come out to an additional $28.75 a month, on average.  If the president and Congress are afraid ask retirees to forego an additional $29 in Social Security payment for one year, how will they have the political courage to reduce the $100 billion in Medicare funding needed to make the various health care reform bills revenue neutral?

© 2009 Tax Policy Forum.