Social Security Smart

What the 0% Social Security COLA Means to Retirees

by Randall Luebke RMA, RFC on October 4, 2011

By Elaine Floyd, CFP

A 0% COLA doesn’t sound good, but given the level of inflation and various legislative actions, retirees have more purchasing power now than they did in 2008. Here are the newly released key
numbers and some talking points to make with your clients.

Is there a nice way to say “Stop whining?”

Gas prices are down from their all-time high. Food and housing prices are
essentially flat (down 0.2% and 0.3%, respectively). Prices overall have
declined 1.7% compared with a year ago, according to the latest release of the
CPI-W, which is the index Social Security trustees use to calculate the cost-of-living adjustment for the coming year. Smokers had it the worst—tobacco prices rose 29%—but otherwise, retirees
enjoyed a respite from rising prices over the past year.

Even medical care, which traditionally rises faster than the general rate of
inflation, was up a modest 3.6%. A switch to generics or one less trip to the
doctor could overcome that.

The media made a big deal out of the zero COLA announcement, showing clips of
seniors complaining about the high cost of living and the fact that their Social
Security checks will remain the same next year. But according to Andrew G.
Biggs, a former SSA administrator who writes a blog about Social Security
issues, the typical retiree will be better off by about $725 in 2010. That’s
because living costs have gone down, but by law Social Security
benefits will not.

In his article “A Diet COLA for
Social Security? Not Really,” Biggs explains that the 5.8% COLA that Social
Security recipients received in January of this year includes inflation that no
longer exists. A spike in energy prices during the summer of 2008 drove up the
third-quarter index used to calculate the 2009 COLA, but by January those prices
had settled back down again. When the COLA was calculated last year, the CPI-W
was 4.7% higher than when it was actually paid. This gave the average Social
Security recipient an extra $650 in buying power.

In addition, most Social Security recipients will not have to pay the 15%
increase in Medicare Part B premiums next year. That’s because of a “hold
harmless” provision in the law that says that if Medicare premiums are deducted
from their Social Security checks, their benefits may not be reduced if the COLA
does not cover the increase in premiums. According to Biggs, this gives Social
Security recipients even more buying power.

The new monthly premium (announced after Biggs wrote his piece) will be
$110.50. Retirees who continue to pay $96.40 will save $169 next year. And since
there is not expected to be a COLA in 2011 either—the index must claw its way
back to 215.5 before the COLA will resume—most Social Security recipients will
get a free ride on next year’s likely increase in Medicare Part B premiums as
well. Unlike Part B premiums, Part D premiums deducted from Social Security
benefits could cause checks to shrink, but the typical increase in Part D
premiums for 2010 will be only $2 month, according to the Center for Medicare
and Medicaid Services.

The bottom line is that retirees should pay more attention to their benefits’
real purchasing power, not the nominal level. Biggs is not unsympathetic to
retirees’ plight. He says that Social Security benefits are not generous and
that many retirees receive lower benefits than are commonly understood. Yet the
level of benefits is a different question from how benefits should be adjusted
to compensate for inflation.

Do retirees really pay more?

It has long been argued that the inflation rate for retirees is higher than
for the general population. After all, seniors spend more on health care, which
has been rising faster than the general rate of inflation. But Biggs argues that
Grandma’s
inflation experience is not much different from everyone else’s. He draws this
conclusion from an analysis of the CPI-E, an
experimental consumer price index designed to track the spending of Americans
age 62 and older.

The CPI-E was reconstructed back to 1982 to provide 25 years of data, from
December 1982 through December 2007. The representative basket of goods and
services was adjusted to reflect the fact that people over 62 spend 47.51% of
their budgets on housing, for example, compared with 42.24% for the CPI-U and
39.96% for the CPI-W. (The CPI-U includes all urban wage earners. The CPI-W,
which is used for the Social Security COLA, is a subset of the CPI-U and
includes only clerical and wage earners who worked at least 37 weeks during the
previous 12 months.) Here’s the breakdown for the three indexes.

Table 1: CPI Relative Importance for the CPI-E, CPI-U, and CPI-W, December 2007
Expenditure group	CPI-E	CPI-U	CPI-W
All items	100.00	100.00	100.00
Food and beverages	12.87	15.10	16.56
Housing	47.51	42.24	39.96
Apparel	2.42	3.57	3.86
Transportation	14.99	17.95	20.37
Medical care	10.81	6.35	5.27
Recreation	4.62	5.38	4.84
Education and communication	3.19	5.97	5.51
Other goods and services (including tobacco)	3.59	3.45	3.64

Source: Bureau of
Labor Statistics

Over the 25-year period, the CPI-E rose 3.3% per year, compared with 3.1% for
the CPI-U and 3.0% for the CPI-W. This was primarily because medical care and
housing—where older Americans spend a disproportionate amount of their
income—experienced price increases that were higher than the overall rate of
inflation.

The movement to switch to the CPI-E for the Social Security COLA eventually
fizzled out, but Biggs says it wouldn’t matter that much anyway. Even if Social
Security had used the CPI-E instead of the CPI-W, there would still be no COLA
in 2010.

The people who really should be complaining

There are two groups of people who have a right to complain about this year’s
COLA announcement, but they probably won’t get much sympathy. Why? Because the
first group can’t exactly be called poor, and the second group is very small,
comprising only those people born in 1947.

High-income Medicare beneficiaries will bear the brunt of Medicare’s price
increase. We talked about preparing retirees for a 0% COLA in June. Now it’s
official. Medicare beneficiaries who are subject to higher Part B premiums
because their income exceeds $85,000 for individuals or $170,000 for married
couples filing jointly will indeed start paying higher premiums in January. It
should be noted that the Centers for Medicare and Medicaid Services (CMS)
supports a Congressional proposal to avoid any increases in premiums next year.
But until Congress decides otherwise, here are the new Part B premiums for
2010:

Table 2: Monthly Part B Premiums for 2010
MAGI Single ($)	MAGI joint ($)	Monthly premium amount ($)
85,000 or less	170,000 or less	110.50*
85,000-107,000	170,000-214,000	154.70
107,000-160,000	214,000-320,000	221.00
160,000-214,000	320,000-428,000	287.30
Over 214,000	Over 428,000	353.60

*Unless the Part B premium is deducted from
their Social Security check, in which case they fall under the “hold harmless”
provision that maintains the Part B premium at $96.40.
Source: Centers for Medicare & Medicaid Services

We mentioned in June that switching to a Medicare Advantage plan could be a
good idea for high-income clients. So far, this is still true. But possible
funding cutbacks could make them less desirable going forward. Stay on top of
Medicare developments and help your clients choose the right plan.

Individuals born in 1947

This one gets a little complicated, but since it affects baby boomers who
turn 62 in 2009 and who are starting to think seriously about Social Security,
you should be aware of a quirk in the law that will reduce their Social Security
benefits.

Biggs calls this the new “notch,” similar to the one that caused benefits to
be reduced for people born in 1917-21 as a result of a number of changes in the
Social Security benefit formula in the 1970s. That issue was eventually
dismissed after a bipartisan congressional commission determined that the
notch’s effects were modest and did not require compensation—but not without a
lot of griping by the retirees in question.

This second notch comes about because Social Security won’t be paying a COLA
over the next two years. Current recipients who received the overly generous
5.8% COLA last year are essentially paying it back over the next two years, as
their benefits remain fixed while the CPI-W catches up. But the people who turn
62 this year didn’t receive that 5.8% COLA, because they hadn’t started
receiving benefits yet. But they’ll have to “pay it back” anyway, even if they
start their benefits later.

SSA’s chief actuary, Steve Goss, argues that those 62-year-olds did receive a
benefit increase because it included a 4.54% increase in the wage index, which
is the index used to calculate benefits at age 62. In most years, wage growth
exceeds price growth, which means benefits for people who haven’t retired yet
are escalating disproportionately faster than for current retirees.
Unfortunately for the 1947 birth cohort, benefits will be 1.3% lower than if
they had been based on the 5.8% COLA. But Goss says that’s not such a big
deal.

Incidentally, the wage-indexing formula has been ripe for reform, because it
generally causes future retirees’ benefits to escalate at a higher rate than the
rate at which current retirees’ benefits go up. Look for it to be one of the
first things Congress tackles when it gets around to Social Security reform.
Read more about the notch issue on Andrew Biggs’s blog.
Other key Social Security thresholds will remain unchanged.

Because of the zero COLA, other key Social Security thresholds will not be
going up next year.

The maximum taxable earnings will stay at $106,800.
The retirement earnings test, or the amount a person under full retirement
age may earn before benefits are withheld, remains at $14,160.