COLA Cuts Come Under Study

COLA Cuts Come Under Study

By Mary Johnson

Now that our federal budget deficit is the only major economic indicator that’s roaring upward, Social Security benefits may be next to go through the wringer.  The policy experts are quietly considering a number of ways to “fix” Social Security’s solvency, and Cost-Of-Living Adjustment (COLA) cuts appear high on a short list of remedies.

Late last year, the Social Security Administration released a policy paper examining the financial impact of COLA cuts.  The paper looks at how the benefits of a number of different demographic groups of beneficiaries would be affected, as well as the effect such a change would have on Social Security’s solvency.

The analysis found that cutting COLAs by one-half of a percentage point (0.5%) would take care of almost 40% of Social Security’s long-range imbalance.  If COLAs were cut a full point (1.0%), that would fix almost 78% of Social Security’s long-range imbalance.  Either would be a huge single fix, the cost of which would be borne entirely by people who have already started benefits and least able to afford it.

In the past, reducing the growth rate of COLAs has appealed to lawmakers because the change looks deceptively tiny, especially in the first year or two.  But don’t let tiny numbers fool you.  The cuts compound over time like interest.

The Social Security Administration’s policy brief notes that “COLA reductions would be cumulative over time causing benefit reductions to increase the longer benefits are received.”  Certain groups who receive benefits longer than average would experience larger reductions, and those groups include some of the sickest and oldest beneficiaries, women, widow(er)s and retired disabled people.

Just how much would cutting the COLA by 1% cost somebody who retires in 2009 with an average benefit of $1,153?  In the first couple of years the difference in the monthly benefit may only be about $12.  But by the end of a 20-year retirement, that monthly difference builds up to an astounding $369 and would cost that retiree a total $40,030 in benefits.

The Senior Citizens League (TSCL) is not about to let this happen.  Social Security needs comprehensive solutions to ensure that benefits for current retirees and the disabled are protected and will not be cut or disrupted in the future.  COLA cuts squarely place the burden on people who have already started benefits and who are least able to make changes.  TSCL is fighting any proposal to cut the COLA or switch to a methodology that would have the same effect.
Sources:  “Provisions That Could Change The Social Security Program,” Social Security Administration, February 2009.  “Distributional Effects of Reducing the Cost-of-Living Adjustments,” Anya Olsen, Social Security Administration, Policy Brief No. 2008-03, November 2008.