Social SecuritySocial Security beneficiaries will get a 1.7% cost of living adjustment in 2013.

The COLA is calculated by a measurement of inflation, which has risen slowly over the past year. However, the inflation calculation used currently, the Consumer Price Index for Wage Earners or CPI-W, may not take in the rise in cost of living for seniors, which most strongly depends on rising health care costs (a separate measure, the Consumer Price Index for the Elderly or CPI-E, accounts for this much better).

The cost of health care has risen well beyond the rate of inflation over the years, particularly for seniors. Indeed, Medicare premium increases could eat up the entire COLA this year, and those come directly out of Social Security checks. So the net result may be flat.

Despite this, last year Congress and the President toyed with changing the COLA calculation to a chained CPI, on the grounds that the cost of living adjustment was too generous to seniors. This would have resulted in a net benefit cut for millions of Americans, and it’s still on the table as part of the menu of changes to deal with a long-term funding gap in Social Security.

Over 56 million seniors will see the 1.7% boost, as well as 8 million Americans on Supplemental Security Income. The average Social Security benefit is around $14,800 a year, and this is often the sole source of income for the individual. Retirement security has lessened over the past few decades, with the elimination of most defined benefit pensions and the rise of 401(k)-style plans, as well as cuts to the personal savings rate. Retirees used to have a multi-legged stool, and now many of them have only Social Security.

The COLA law is statutory, signed by President Nixon in 1972. Beneficiaries must receive a cost of living adjustment calculated using inflation. Unfortunately, inflation has been so low through the Great Recession that beneficiaries received no COLA in 2010 and 2011. Benefits increased 3.6% in 2012. The Recovery Act did provide a $250 one-time payment to beneficiaries in 2009.

So the last four years of COLA increases have increased benefits for seniors by less than 6%. Despite this, we have continued discussion of the need to make changes to the program, including cutting benefits, to satisfy an actuarial projection 30 years down the road. That includes proposals to increase the retirement age, the least courageous thing a politician can say.

This is one of Washington, D.C.’s more disagreeable conceits. The people wandering around calling for a higher retirement age will never feel the bite of the policy. Think tankers and politicians and columnists don’t retire at age 62, or even age 65. They love their work, which mostly requires sitting down in air-conditioned rooms. They stick around pretty much until they’re about to die [...]

Meanwhile, you could do more to erase Social Security’s shortfall by simply lifting the payroll tax cap. A lot more. According to the Congressional Budget Office, raising the federal retirement age to 70 would solve about half of Social Security funding problem, while lifting the payroll tax cap would solve all of it.

As it happens, lifting the payroll tax cap would also end up costing eminent think tankers and journalists and lobbyists and politicians a whole lot of money. Perhaps consequentially, it’s a rather less popular policy idea in this town. Many consider it an easy way out, even though it would be much harder on them. Courage and sacrifice for thee, but not for me.

Indeed. More here.

Image by DonkeyHotey under Creative Commons License