Edward Lotterman: Social Security remains a good deal for many | Edward Lotterman's columns | Idaho Statesman
Cost-of-living increases for Social Security had become so routine over the past several decades that it set off outrage when news spread that for the second year in a row, there would be no increase in January. Now Congress is considering $250 payments to Social Security recipients.
It seems like a good time to look at how COLAs came into use and how they have changed.
The original Social Security Act of 1935 made no provision for COLAs. Nor was there one for 15 years after passage of the Act. It was only in 1950, 10 years after the first benefits were paid under formulas set in 1935, that Congress passed legislation to increase benefits.
That 70 percent increase was less than the 76 percent increase in the general Consumer Price Index over the same period. But the next two increases mandated by Congress, in 1952 and 1954, were well above general price rises. The increases continued every few years, and the upshot of the whole process was that with the 10 percent increase that took effect in January 1971, benefits were 3.7 times as high as stipulated in 1935 even though consumer prices had only increased by a factor of 2.9. The real buying power of benefits had increased by about a fourth.
In 1972, a bidding war between President Richard Nixon and powerful Democratic Congressman Wilbur Mills resulted in a dramatic increase of 20 percent. The 1972 law also provided for automatic increases to start in 1975, tied to the CPI. Moreover, there were interim increases so that, with the first automatic increase in 1975, inflation-adjusted benefits stood 38 percent above original levels.
Although most recipients thought they were barely keeping up during the high-inflation 1970s, the benefit increase from February 1968 to June 1975, at 82 percent, was well above accumulated inflation of 57 percent.
Since 1975, real benefits have been flat in terms of prices measured by the CPI.
One consequence of benefits rising faster than general prices in those first four decades, while FICA contribution rates and applicable earnings ceilings remained low, was that many recipients in the 1975-95 period received an enormous “return” on what they had paid in.
And when one takes into account what it would have cost to buy private disability and life insurance that provided protection equal to the disability and survivors’ components of Social Security, the retirement benefits are a pretty good deal for most people.
Because of the way Social Security benefits are computed — 90 percent of the first $761 of “average indexed monthly earnings” and 32 percent of everything from $761 through $4,586, but only 15 percent of anything over that last amount — lower-income people get a higher fraction of their pre-retirement earnings than do higher-income individuals and a much higher “return” on the taxes they paid. But nearly all are convinced they are only getting their own money back.
Many of the 58 million retirees and disabled Americans who receive Social Security are highly dependent on their monthly payment. For more than half of all retirees, it constitutes the majority of their income. For a third, it makes up more than 90 percent.
But those who complain about no COLA for 2011 generally did not express much appreciation for the 5.6 percent bump they got in 2008. Much of that was due to 2008’s high energy prices that make up a smaller fraction of household spending for seniors than for the general populace. But now that these prices have fallen, seniors concentrate on items that they know went up. This is not unique; virtually all people pay attention to price increases but ignore items with stable or falling prices. So there are charges of unfairness, often by the people who are doing the best in relative terms under the program.
Economist Edward Lotterman teaches and writes in St. Paul, Minn. Write him at ed@edlotterman.com.
8READ MORE OF EDWARD LOTTERMAN’S COLUMNS
Comments
Post a Comment