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Social Security and the COLA

By Jennie L. Phipps · Bankrate.com
Thursday, December 16, 2010
Posted: 3 pm ET

Social Security cost of living adjustments, or COLAs, are shaping up to be a major retirement planning issue in 2011.

Here are the two factors that retirees or people thinking about retirement ought to consider.

One is the overly generous COLA that Social Security recipients got in 2009, resulting inadvertently in no COLA in either 2010 or 2011 -- a freeze that will cut benefits for new retirees for the rest of their lives.

It worked this way, according to the Center for Retirement Research at Boston College. The Consumer Price Index, which triggers the COLA, increased significantly through mid-2008, driven by rising energy costs. This price increase caused a 5.8 percent COLA to be announced in the fall of 2008, the largest since 1982. Immediately after the COLA was set, prices declined, but the law requires that Social Security recipients be given the increase anyway, and they were.

Cost of No COLA
Year of birth 62-year-old retiree 66-year-old retiree
1946 -$30,163.60 -$39,152.50
1947 -$31,436.10 -$39,463.20
1948 -$20,871.00 -$26,130.60
1949 -$8,908.90 -$11,141.30
1950 -$2,229.20 -$2,880.90
1951 -$463.00 -$648.70
Source: Senior Citizens League

To compensate for an increase that was greater than inflation, Social Security announced that there would be no COLA in either 2010 or 2011. If CPI rises as expected, there will be a minimal 1.4 percent COLA in 2012.

Today, the Senior Citizens League, which claims to be the nation's largest organization of seniors, calculated the loss of the compounding effect of  missing two years' worth of COLAs on 25 years of benefits. You can see their results in the accompanying chart. Seniors who turn 62 during the years of no COLA will be affected the most. If you were born in 1946 and claim Social Security at 62 and get an average amount -- about $1,150 in monthly benefits -- you'll receive $30,163.60 less over 25 years than you would if you had been born in 1945, according to the Senior Citizens League calculations. The league is recommending an emergency increase to eliminate this reduction.

The second thing that could affect COLAs for every Social Security recipient -- not just new retirees -- is the deficit reduction proposal to change how the COLA is calculated from the CPI-W to the C-CPI-U, or Chained CPI. That change is estimated to reduce annual increases by three-tenths of 1 percent. That may not sound like much, but for someone who started collecting at 62 and who lives to age 92, it would cut lifetime benefits by about 9 percent, or about $22,000, according to the National Academy of Social Insurance.

Is that an unreasonable sacrifice to ask seniors to make in order to leave our children with less of a fiscal burden? I don't think it is, but others clearly perceive it differently. How do you see it?

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15 Comments
Chuck
February 04, 2011 at 8:18 am

Why not give and withhold COLAs on a quarterly or semi-annual basis. Our cost of living (groceries have increased in cost by 15% and in portions packaging by 15% in to years) is such that for the first time in 50 years we look nervously to see we get to the end of the month before we get to the end of our bank balance. Our savings earn less than 1/2 of one percent while living costs like home-owner's and auto insurance increase by 5% to 20% per year. In 2009 our health care costs took away nearly 33% of our total income and we had no major medical disasters. Decent, not top of the line, hearing aids cost $4400. A crown on that aging tooth costs $1500: 5 years ago it cost $800. We can't buy the 10 pound bag of potatoes for $.20 a pound because they shrivel and rot before we can eat them all, so $.79 to $.98 a pound is what we pay. Show me a tomato (as tasteless as they are) even in August for less than $1 a pound and I'll buy it. We can't have a garden because we can't afford to water it or get anything out of it before the neighbors do their midnight raid on it. We are required to have home owner's and auto insurance which went up 20% in two years. We must pay our property taxes or lose our credit rating (up by law 3% per year). Our electric and water and sewer bills all went up over 5% per year for the past 5 years. We drive a 9 year old car which we can't afford to repair because new ones are out of the question because we can't afford the car, the insurance, nor the license (up 50% in Oregon in 3 years). Who can afford to stay in a 2 star hotel/motel for $115 a night (plus $12 for bed tax)? Who can afford to eat a decent meal at a decent restaurant for $40 for two not including beverages or dessert?
We haven't been on a vacation or tour or travelled abroad for 20 years. We were working toward a retirement which we find so costly we have to stay home and pay heating and lighting bills which increase with astonishing 7% to 10% regularity each year. Our phone bill has increased a steady 5% each year since 2005. Our TV is 6 years old. Who knew we would not get help from COLAs on our small pension as well as our Social Security?

Yes, we're dying here and are putting that off until we can afford a funeral (cremation is now over $800; was $500 when we bought the prepaid and now we couldn't come up with the %60 increase if we were alive!).

No COLA, my tax bill!

Chuck
February 04, 2011 at 7:44 am

Not only did we not get a S.S.COLA for two years, but our small pensions withheld COLAs. too. So in order to have a mortgage (no increase) my bank requires that I pay my property taxes (which automatically increases 3% each year) as well as homeowners' insurance (which increases each year, 20011 by 18%) and I notice medigap and dental insurance increase by about 5% per year 2010 and 2011) as well as long-term-care-insurance (20%)goes up as well. Gas is now nearly 70% more than it was when it was decided not to give a S.S. COLA. Those along with increases in satellite TV, inter-net access, my small business advertising, employee health care costs, decreases in grocery volume and weight portions, increases in cost of meat, fish, chicken, cheese, diet soft drinks,all fruits and vegetables, water and sewage fees, electrical KWH costs(up 7% in two years), auto insurance (up 6% in two years), service calls for home maintenance (up 20%), auto maintenance(oil change up 5% to 10%), tires (up 10% since last replaced), and automobiles (up 10% per year no matter how tiny a car I can't afford to buy), all add up to my having to worry about getting to end of the month before I get to the end of my checking account for the first time in 50 years. 2009 health care costs or my wife and me took nearly 40% of our total income. We cannot ever afford to stay in a hotel at over $100 a night nor eat a decent meal in a two star restaurant for $35 with no beverages or dessert.

Why can't they give and take away COLAs for 6 month periods to cover living costs. I can't afford to play at all. The library just increased its fines by 50% and decreased hours by 25%, for heaven's sake. New books? Furgeddabou!

Our life style has none. Our clothes are all (except socks and underwear) 10 to 20 years old.

Of course we are both getting older at decreasing percentage rates each year, but we can't even afford death: funeral costs(even cremation) are up 300% to 700% since we bought life insurance 50 years ago.

COLA? I would settle for the store brand cost of living increase.

Jackson
January 20, 2011 at 7:18 pm

What is the problem with SSI payments in the amount of 2000.00 per month as a decent benefit without having to leave your homes and entering the arena.

J.Ryan
January 10, 2011 at 2:38 pm

For my future Social Security increases I'll take whatever "CPI-XXX?" that is used for Congress and Federal Government Employees..!!!

PAUL BENSON
December 31, 2010 at 6:40 am

MAYBE PRICES DIDNT INCREASE, BUT ONE THING FOR SURE THE SIZE OF ALL PRODUCTS HAS BEED ALMOST CUT IN HALF, SO LESS GOODS FOR SAME MONEY, OR SOAP PRODUCTS AN IREM OF SAME ARE GETTING MORE WATER TO HELP SAVE COST TO MAKER.

LESS FOR SAME COST