It's Official: No Social Security Increase

Social Security benefits won't increase, meaning trouble for older Americans.

August 13, 2009, 4:44 PM

Oct. 15, 2009— -- Older Americans had dreaded hearing the news for months -- and today the government made it official: For the first time since 1975, there will be no cost-of-living adjustment, or COLA, for Americans receiving Social Security checks next year.

Under the law, Social Security payments are supposed to increase annually if U.S. consumer prices increase. But over the past 12 months, prices have declined. Specifically, the CPI-W -- the price index upon which Social Security adjustments are based -- has dropped 1.7 percent since September 2008.

Many, including President Obama, the AARP and the Social Security Administration itself, are calling for Congress to approve a $250 stimulus payment to older Americans and other groups, including veterans and those receiving disability benefits, to compensate for the lack of a COLA.

"This additional assistance will be especially important in the coming months, as countless seniors and others have seen their retirement accounts and home values decline as a result of this economic crisis," Obama said.

Rising health care costs pose another serious challenge for older Americans, who tend to use health care services more often than younger Americans.

"It is no question that it will be a hardship for individuals who are going to continue to see an increase in their out-of-pocket health care expenses to not have a cost-of-living increase in Social Security," Cristina Martin Firvida, director of economic security for AARP, told recently.

Last year, when food and energy costs were squeezing wallets across the country, older Americans saw a jump in benefits. Social Security Administration increased payments by 5.8 percent.

But by April of this year, dropping consumer prices led the Congressional Budget Office to predict there would be no adjustment for 2010.

The notion of the government's keeping Social Security payments static may bring some cheer to those worried that the system is headed for bankruptcy.

But it's of little comfort for older people who need the money now.

Sylvia Schneider, 80, of New York City, says her monthly Social Security check is her primary form of income. The average monthly benefit is just over $1,050 this year, according to the Social Security Administration.

"The government has a right not to increase it. I understand that," Schneider said. But, she said, she's still worried about making ends meet.

The problem, critics say, is that the metric the Social Security Administration relies on to determine increases in benefits isn't tailored to the elderly.

Seniors' Health Care Costs Stretch Social Security Checks

The Social Security Administration uses a part of the Consumer Price Index known as the CPI-W, which measures spending patterns of blue-collar workers. Social Security payments have been linked to the CPI-W for more than three decades.

But the spending patterns measured by the CPI-W and the general CPI -- also known as the CPI-U -- don't match those of the elderly, especially in the case of health care: The CPI-W assumes people spend about 5 percent of their income on health care. For many older Americans, that number is much higher.

"The basket of goods that are used in the CPI are not represented by the basket of goods consumed by the elderly. That's the big issue," said Praveen K. Kopalle, an associate professor of business administration at the Tuck School of Business at Dartmouth College.

"They gripe about it a lot," said Kopalle, who studies consumer pricing. As seniors pay more for health care and other services that don't factor prominently into the CPI, the apparent disconnect between their cost of living and their benefits creates a "conundrum" for them, he said.

The solution to the problem, some say, is to establish a pricing index that focuses specifically on the elderly and their spending habits.

A bill introduced in Congress earlier this year aims to do just that: Under the Consumer Price Index for Elderly Consumers Act of 2009, proposed before the House in May 2009, spending by Americans 62 or older would be monitored and used to calculate Social Security and Medicare benefits.

"We must provide the basic benefits that our seniors can count on, regardless of the ups and downs of the economy," Rep. Charles A. Gonzalez, D-Texas, said in a written statement earlier this summer. "My legislative proposal is a rational approach to a very real problem."

But if the bill is passed -- never a sure bet, especially at a time when health care reform itself seems to overshadow everything else -- it won't be a quick fix, experts say.

Experimental Measure for Social Security?

The U.S. Bureau of Labor Statistics has actually had an elderly-spending index for years, but it's an experimental one. Making the index viable for use on things like Social Security benefits, said BLS economist Sanjeev Katz, would require overcoming some serious statistical hurdles.

The new index wouldn't be ready in time to force an increase in Social Security benefits in 2010, said AARP's Firvida.

"It's not ready for prime time," she said. "You can't just ramp this up and replace the CPI-W."

The lack of a benefit increase, Firvida added, "is not the kind of contingency I think that people planned for."

ABC News' Nathalie Tadena contributed to this report.

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