No COLA For You: Seniors Discover the Downside of Deflation

(MoneyWatch)  Social Security recipients and federal pensioners today discovered the downside of ultra-low inflation: Their COLA completely lost its fizz.

For the first time since those groups began getting annual cost-of-living adjustments (COLA) in 1975, the Social Security Administration and the U. S. Labor Department confirmed this morning what had been anticipated: There will be no benefit increases for 2010.

The lid on benefits is a stinging blow for current beneficiaries who this year got a 5.8% payment boost, the highest annual bump since 1982. Anticipating today's announcement, President Obama and Democratic Congressional leaders yesterday proposed spending $13 billion for $250 one-time payments to the 57 million Americans who receive Social Security, federal pension or disabled veteran benefits. That would come on top of an earlier $250 payment to older and disabled Americans included in February's economic-stimulus package.

The lack of a COLA increase, however, is good news for future recipients in that it preserves assets for the Social Security Fund, whose trustees project will be insolvent in 28 years without some combination of tax hikes, benefit cuts and rise in collection ages.

It also means there will be no increase for 2010 in the maximum amount of workers' earnings subject to Social Security payroll tax. That ceiling is $106,800 this year, taxed for Social Security at 6.2% for employees on company payrolls and 12.4% for the self-employed.

The absence of an adjustment is in stark contrast to when COLA increases were first introduced during a period of historically high inflation. In the first year in 1975 beneficiaries received an 8% hike, which later hit a record 14.3% in 1980. But since 1983, the COLA increase exceeded 5% only twice, including last year, and averaged 2.8% from 1991 through this year

The adjustment for Social Security and federal pensions is based on Consumer Price Index's change in the July-to-September period vs. a year earlier. In the 12 months ended September 30, consumer prices actually fell 1.3 percent, the Labor Department said today, due to a sharp drop in fuel and food prices amid the global economic downturn.

The difficulty for Social Security recipients having their benefits tied to the CPI is that the inflation rate for goods and services for their age group tends to run one or two percentage points higher than average since much of their spending is for medical care, whose costs rise faster than the general inflation rate. Given that they won't be getting a benefit increase for 2010, Social Security recipients will have an even greater stake in the outcome of any health-care reform package that may be enacted.