Social Security: Two years with no COLA
The government has decided inflation is so low that for the first time there will be no Cost of Living Adjustment or COLA (increase) in Social Security benefits for the next two years.
On Social Security, first things first:
If you or a loved one is on Social Security or Supplemental Security Income and that $250 stimulus payment for each beneficiary has not arrived by check or direct deposit, visit socialsecurity.gov online or call 800-772-1213. Start inquiring on June 4.
Medicaid patients in nursing homes may keep their $250, which will not be counted as income for Medicaid purposes. Hang up on anyone calling to help you get the payment. Don't spend it all in one place.
Second, you may have heard that the government has decided inflation is so low that for the first time there will be no Cost of Living Adjustment or COLA (increase) in Social Security benefits for the next two years. Former Deputy Social Security Commissioner Andrew Biggs says this news is not all bad because benefits will remain the same while the cost of living is less, which means many beneficiaries will still be ahead. However, many retirement experts have suggested the cost-of-living index for older people should be higher than the rest of the population, in large part because of out-of-pocket medical and drug costs.
Barbara Kennelly of the National Committee to Preserve Social Security and Medicare says that "zero COLAS would also mean no Medicare Part B premium increases" for most beneficiaries, for, by law, Social Security benefits may not decrease for current beneficiaries. However, new and affluent beneficiaries will be subject to the higher Part B premiums. And Part D premiums, which are expected to rise by 11 percent, she said, will continue to shred the already-tattered budgets of many older Americans.
Last, as expected, the 2009 trustees report on the health of Social Security and Medicare, released on May 12, brought more bad economic news for these twin pillars of the nation's social insurance. The recession, which has put millions out of work and unable to pay Social Security and Medicare payroll taxes, has hurt the finances of both programs.
According to the report: "The projected point at which tax revenues will fall below program costs comes in 2016 _ one year sooner than the estimate in last year's report." That's when the program will begin to dip into the $2.8 trillion trust fund to pay benefits.
The trust fund will continue to grow, said the trustees, but it will be exhausted by 2037, instead of last year's projection of 2041. That would mean Social Security, with payroll taxes as its sole income, would be able to pay only 75 percent of the earned benefits.
But the good news is that looking as far ahead as 75 years (which the law requires of the trustees), the "projected actuarial deficit ... is 2 percent of taxable payroll." That means the equivalent of a 1 percent increase each in employee and employer payroll taxes would close the gap. More important, all these projections are based on a slow-growing economy and the supposition that nothing will be done in the meantime.
Thus, Social Security Commissioner Michael Astrue concluded that while the report "contains some disappointing but not unexpected news ... the Social Security system will weather this recession. ..." But he called for "reforming the system" sooner rather than later.
As expected, the reformers, Democrats who want to save the system, and Republicans who would turn it into millions of 401(k)s, were in full cry to raise the retirement age or cut benefits.
But President Barack Obama, in a little-reported reply last month to a high school student at a town-hall meeting in Arnold, Mo., rejected these suggestions and laid out the issue and options.
One option, he noted, "is to gradually raise the retirement age. I don't think this is the best solution. ... If the retirement age is already 67 and now you get it up to 68 or 69, if you're working on an assembly line and you've been doing that for 40 years ... that's hard work. ... You could cut benefits. ... You could raise the tax on everybody, so everybody's payroll tax goes up a little bit. Or you could do what I think is the best solution. Which is you can raise the cap on the payroll tax."
As he explained, "whether you're Bill Gates or a high school student you pay the same rate on your payroll tax on salaries capped at $102,000. ... Now the majority of people here ... you pay a payroll tax on every dime that you earn. But if you're Bill Gates, you're paying on one-tenth of 1 percent of what you earn because you earn so much more than $102,000."
Anticipating the trustees' report, Obama concluded, "the big problem is not Social Security; it's Medicare and Medicaid. ... Those are the things that are really breaking the bank."
As I noted last week, the survival of Medicare and Medicaid may depend on the looming battle over a new health care and insurance system. They could also be the models for reform.
Saul Friedman writes Gray Matters, a personal finance column directed at older Americans, for Newsday. He can be reached at email@example.com.
(c) 2009, Newsday.
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