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Tighter belts ahead

WASHINGTON — For the first time in more than three decades, Social Security recipients will not get any increase in their benefits next year and likely also in 2011, federal forecasts show. The absence of a cost-of-living adjustment, calculated under a formula set by law, will be a shock to older Americans already hit by plummeting home values, investment losses and rising health costs. More than 50 million people receive Social Security. "Most seniors have never been through a year in which there was no Social Security COLA," said David Certner, legislative counsel at AARP. Beneficiaries have received automatic cost-of-living adjustments every year since 1975; the increase this year was 5.8 percent. The forecasts, by the Obama administration and the Congressional Budget Office, indicate that Social Security beneficiaries will not receive any cost-of-living increase in 2010, 2011 and possibly even into 2012.

Why now?

The cost-of-living adjustment, or COLA, is intended to preserve the purchasing power of Social Security by increasing benefits to keep pace with consumer prices. But in the last year, overall inflation has been low, largely because of the economic downturn and a decline in energy prices. In theory, low inflation is good for people on fixed incomes. But it is creating political and policy problems for Congress, which is just learning of the implications for Social Security and also for Medicare.

Why would Medicare benefits be affected?

A freeze in Social Security benefits would have major implications for Medicare because the COLA, in effect, puts a cap on premiums for Part B of Medicare, which covers doctors' services.

Most people on Medicare have Part B premiums deducted from their monthly Social Security checks. These premiums have historically increased much faster than Social Security benefits. Under federal law, most Medicare beneficiaries have some protection. Their basic Part B premiums cannot rise more than the dollar amount of the cost-of-living increase in their Social Security checks. So if there is no COLA, the basic Part B premiums will not increase for about three-fourths of beneficiaries.

But one-fourth of Medicare beneficiaries are not protected by the law, and their premiums could increase. Most Medicare beneficiaries pay a monthly Part B premium of $96.40. The Congressional Budget Office estimates that the basic premium will rise to $119 next year and $123 in 2011 for those who are not protected under federal law.

What about prescription drug coverage?

In addition, millions of beneficiaries could see higher premiums for drug coverage, provided under Part D of Medicare. Social Security and Medicare trustees will describe the outlook for benefits and premiums in their annual reports this month. Officials have already said the condition of Medicare's hospital insurance trust fund is deteriorating because of the recession, which has reduced payroll tax revenues, the main source of money for the fund.

Spending on Social Security and Medicare totaled more than $1 trillion last year, accounting for more than one-third of the federal budget.

"If, as expected, there is no COLA in Social Security next year but premiums for drug coverage increase, as expected, millions of beneficiaries will see their Social Security checks reduced for the first time." AARP's Certner said.

What's the long-term outlook for my Social Security checks?

Douglas Elmendorf, director of the Congressional Budget Office, predicted that inflation would remain low for several years, so Social Security might not pay a cost-of-living increase until January 2013. President Barack Obama's budget assumes no increase in 2010 or 2011, then a 1.4 percent COLA in 2012.

Tighter belts ahead 05/02/09 [Last modified: Saturday, May 2, 2009 8:58pm]
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