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.
|Year of birth||62-year-old retiree||66-year-old retiree|
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?