Alexandria, VA (October 30, 2013) The 1.5% 2014 Social Security cost-of-living adjustment (COLA) confirms that the annual boost is at record lows. According to an analysis by The Senior Citizens League (TSCL), the average COLA between 2010 through 2014 hits new lows at just 1.5% &ndash far lower than the 3% average over the past 3 decades.
More than 58 million beneficiaries rely on COLAs to protect the purchasing power of their Social Security benefits. The record lows in recent years are wreaking havoc on Social Security income in two ways. "Retirees have lost almost one-third of the buying power of their benefits, and low COLAs will also result in lower initial retirement benefits even if seniors haven't filed claims yet," says TSCL Chairman, Ed Cates.
According to TSCL's 2013 Survey of Senior Costs, Social Security benefits have lost 31 percent of their buying power since 2000. Over the past 13 years the COLA increased benefits just 38 percent while typical senior expenses have jumped 81 percent, more than twice as fast. Seniors who haven't claimed benefits yet are also affected because COLAs are used in the benefit formula to determine the initial benefit amount. Because COLAs compound like interest over time, low COLAs can have a big impact on total lifetime benefits due to the loss of compounding.
Yet COLAs remain a major target for cuts in the next round of budget negotiations. President Obama and House budget plans call for trimming the growth by using the more slowly growing "chained CPI" to calculate the annual boost. Because the effect compounds over time, the cuts grow deeper every year. TSCL calculates that seniors with an average monthly benefit of $1,200 would lose about $2,667 over the first ten years, and the benefit would be $1,439 instead of $1,482 – $43 per month lower. In 20 years the benefit loss would total $11,981, and the monthly payment would be $1,833 instead of $1,943 &ndash $110 lower. By the end of 30 years the loss in benefits would be $31,747 and the monthly payment would be $2,346 instead of $2,561 – $215 lower.
But the debt limit is putting pressure on Social Security because the government is paying out more in benefits than cash revenues coming in. The Trust Fund shows a surplus – on paper at least – but that surplus is not from payroll cash revenues. Instead, it's "interest" earned by I.O.U. bonds held by the Trust Fund. When the rest of the federal budget is in deficit, the government must borrow the interest payment needed to cover benefits. "That borrowing is subject to the debt limit," Cates points out. The Social Security Trust Fund is the single largest holder of government debt, totaling more than $2.7 trillion. "The government will again hit the debt limit by February 7th and seniors should be concerned because both Congress and the President have indicated that there are limits to how high our debt can go," Cates notes.
TSCL believes that cutting the COLA is NOT the solution to lowering debt. According to a recent TSCL survey more than 78 percent of seniors either favor, or somewhat favor, requiring workers with incomes higher than $113,700 to pay Social Security taxes on all of their wages. According to Social Security's Office of the Actuary, this option – raising the maximum taxable wage limit – would reduce Social Security's financing deficit by as much as 90 percent.
Under current law, middle-to-low earning workers pay Social Security taxes of 6.2% on all of their income (and employers match that amount.) But anyone earning more than $113,700 per year pays no Social Security on the excess. For example, workers earning $32,000 a year pay Social Security on 100% of their earnings. But someone who earns tens times as much, $320,000, will pay Social Security taxes on just $113,700, only 36% of that individual's earnings. He or she would pay no Social Security taxes at all on the remaining $206,300 in earnings.
"COLA cuts are not the only solution, and we believe there’s a more fair choice that would resolve as much as 90% of Social Security's funding problems," says Cates. "Congress should not ask seniors to take deep cuts while continuing to hand out a huge Social Security tax break to high income earners," Cates says. TSCL is fighting COLA cuts. To learn how much COLA cuts would cost, try TSCL's Chained COLA calculator.