Which Type Of C.O.L.A.* Is B.E.S.T.**?

Which Type Of C.O.L.A.*  Is B.E.S.T.**?

Beginning with June 1975, Social Security benefits increased automatically with increases in the cost of living. In 1983, the Social Security benefit cost-of-living-increase became effective in December (payable in January of the next year) rather than June. Here is a history of the dates and amounts of increases over the years:  http://policy.ssa.gov/poms.nsf/lnx/0300601120. The December 2013 COLA amount is 1.5%.

The COLA is an across the board percentage increase for all Social Security beneficiaries. (It is a little more complicated than this due to rounding and other deductions, but, in general, that is how it works.)

Thus, for someone who gets a $2,000 a month Social Security check that person will receive a $30 or 1.5% increase. While the December 2013 COLA is relatively small, a person who is currently getting a $2000 check might be able to buy a small bag of groceries with their COLA increase.

However, for someone who receives a smaller Social Security check, for example, of $450 per month, the 1.5% COLA that they will receive will be only $6 or $7. If the Medicare premium being deducted from their Social Security goes up significantly, they may see even less of an increase or perhaps nothing at all.

Senator Elizabeth Warren of Massachusetts is proposing improving Social Security by providing larger COLAs based on a more realistic formula of using increases in the cost of living relevant for retirees. This is a good idea which should be pursued.

In the meantime, is their a better way to pay out that 1.5% increase in Social Security payouts for December starting in January 2014? Why not pay out a flat or “de-fizzed” COLA to all recipients?

Here is a chart that as of November 2013 the total number of Social Security beneficiaries and the total amount of benefits they are being paid each month: www.ssa.gov/policy/docs/quickfacts/stat_snapshot . Roughly, in 2013, Social Security pays out $67.4 billion each month to 57.9 million beneficiaries.

A 1.5% COLA paid out on this amount, then, would amount to $1 billion. If each beneficiary were to receive the same amount of a COLA or a flat COLA, each beneficiary would receive $17 more each month. That’s not much, but it is much better than $6. (This issue is a little more complex than this, as some beneficiaries receive benefits as part of a family and it does make sense to limit the flat increases to family members to 50% of the wage earner’s increase – a relatively simple algebra problem.)

It is likely that legislation would be required for Social Security to be able to pay out the “de-fizzed” flat COLA. That’s why I would like a seat at the table when Social Security reform is legislated. However, keep in mind that not all changes to Social Security procedures require a change in the law.

Let’s pay Social Security COLAs in a more equitable, progressive fashion!

* Cost-Of-Living-Adjustment      **Balanced-Equitable-Solvent-Tested