It sounds like an act of bureaucratic cruelty: Denying a modest cost-of-living increase to 58 million humble pensioners. Yet the freeze on Social Security payments for 2011 represents the responsible use of government money, and it highlights the paradoxical gap between people's perception of their well-being and the actual facts.
Although it makes President Obama and his fellow Democrats look heartless, the one-year freeze on payments recently announced by the Social Security Administration isn't anybody's decision. It's the result of a simple mathematical rule. The annual cost-of-living adjustment, or COLA, is based on the rate of inflation as measured in the third quarter of every year. If inflation rises, Social Security payments rise by the same amount, so that the payments don't get eroded by inflation over time. The reason there's almost always a small boost in payments is that there's almost always inflation.
But not lately. From the third quarter of 2008 to 2009, there was actually deflation, which means that prices went down, overall. That's why there was no COLA last year. (Luckily for Social Security recipients, payments don't go down when there's deflation.) This year, the consumer-price index, which measures inflation, was slightly above the levels from last year but still about even with levels from 2008. Since Social Security calculates the COLA based on the rate of inflation since the last time there was an adjustment, not from the prior year, the freeze is on even though there was a tiny amount of inflation between 2009 and 2010.
Many Social Security recipients are upset about the freeze, since they feel they're being deprived of something they deserve. "Our bills are going up and our Social Security isn't," one retiree complained to the Associated Press. That may be true for a given individual, but for everybody as a whole, the cost of living is not going up, and for the few things that might seem to be getting more expensive, a lot of other stuff is getting cheaper. Falling prices, however, don't catch people's attention as much as rising ones, so people tend to believe that life is getting more expensive even when it's not.
The consumer-price index measures the cost of more than 200 items that account for most of the stuff that retirees, and every other American, spend their money on. And many of those items have been getting considerably cheaper, thanks to technology advancements and low-cost imports from places like China. The cost of TVs and computers, when adjusted for inflation, has fallen by more than 80 percent over the last 10 years. Furniture is down by about 12 percent, clothing by 8 percent. Long-distance phone rates have plunged, whether you're talking on a landline phone or a wireless. Housing has gotten cheaper too, whether you rent or own, thanks to the housing bust and more people moving in together. Food and energy prices have risen modestly over the last 10 years, but those increases also led to hikes in Social Security payments prior to 2009 that helped recipients cope with the higher costs. Over the last two years, food and energy prices have flat-lined along with practically everything else.
There are two big things whose cost has been going up by more than the overall inflation rate: healthcare and education. But Social Security recipients, who are mostly retired, are better shielded from those price spikes than families with kids and many other Americans. Retirees, for the most part, don't need to deal with the rising cost of a college education. And since everybody 65 and over qualifies for Medicare, older Americans already have a hedge against rising healthcare costs. Yes, there are holes in Medicare, which sometimes leaves the elderly with unmanageable costs for prescription drugs and other things. But there are 51 million other Americans who have no health insurance at all, and are vulnerable to catastrophic bills if something goes wrong.
Advocates for the retired want an exemption from the freeze and a Congressionally approved COLA, and there's a good chance they'll get it. The recession and its aftermath have been hard on retirees, along with everybody else. The extremely low interest rates engineered by the Federal Reserve have punished people living on fixed incomes, who need to earn decent interest on their savings. Stocks are still down about 25 percent from the 2007 peak, so anybody who was close to retirement age over the last couple of years and had the bulk of their nest egg in stocks (which they shouldn't have) is still feeling a sharp pinch.
[See 3 myths about disappearing prosperity.]
After the 2009 freeze in Social Security payments was announced, President Obama and Congressional Democrats felt such sympathy for retirees that they approved a $250 "relief" payment to each Social Security recipient, a little something extra from Uncle Sam to one of the nation's most active voting blocs. Congress will consider a similar measure this year, during the lame-duck session that follows the November midterm elections.
If it had come up before the elections, passage probably would have been guaranteed, since it's irresistible to give seniors free money right before they head out to vote. But in the aftermath of the elections, another round of free money for seniors might get more scrutiny, especially since it would add another $15 billion or so to the enormous national debt. And responsible legislators, if there are any, might reasonably ask if that money could be better spent helping kids afford college or the uninsured afford healthcare or the 15 million unemployed Americans get training for fields where there are more jobs.
Or they might decide it's best not to give the money away at all. Nobody begrudges seniors the right to a comfortable retirement, but with America headed for insolvency unless something changes, it's worth asking how long we can afford to make unfunded payments to retirees to help them cope with price increases that don't even exist. Probably not much longer.