Starting next year, millions of our senior citizens who depend on every dollar of their Social Security pensions will have a tough time. The Government reported that there will be no Cost of Living Adjustment (COLA) on Social Security pensions for the next two years. This hasn't happened since the automatic increases were adopted in 1975. It has much of our nation in an uproar, and for good reason.
 

Social Security

Social Security benefits are payments made to people under the Social Security system run by the US Social Security Administration. The various benefits are designed to meet different kinds of needs. For example, the old age pension is payable if you have reached retirement age. In addition, you may also collect disability benefits and unemployment benefits. Social Security is funded from people's paychecks, where a Social Security tax is automatically deducted. 

Social Security pensions are determined at the time when workers first apply for those benefits, typically at age 62. Once benefits are determined, they are automatically increased every year to keep pace with the general increase in prices - this is known as the Cost of Living Adjustment (COLA). It prevents the purchasing power of retirees' monthly benefit checks from declining over time due to inflation. 

Inflation is when prices rise in the economy. That means that $5 would have bought you more items last year than this year. Due to inflation, $5 today is worth a different amount than it was worth last year. Similarly, your pension follows the same logic. The amount you received last year is worth less even though it's the same amount. As a result, pensions are typically adjusted by a COLA.

The COLA is determined each year by the Social Security Administration based on observed inflation over the previous year. For example, the COLA applicable to Social Security benefits payable in January 2009 was 5.8%, calculated on the basis of inflation observed between 2007 and 2008. However, for 2010 and 2011, there will be no COLA added to people's pensions. Inflation this year has been negative because energy prices are lower than they were in 2008.

Does That Mean that Social Security Payments Will Be Reduced?

By law, the government can't reduce Social Security benefits. However, the monthly payments for millions of members of the Medicare prescription drug program will be reduced because the premiums are scheduled to increase. For senior citizens, the increase in insurance premiums taken together with no COLA additions will make a huge difference in their budgets. 

Senior citizens spend a lot of their money on health care. Generally, health care costs rise faster than the rate of inflation. That means for the elderly, the majority of their costs and expenses will still go up. And starting next year, their income won't.

Palmer Hanebutt, a retiree in Evansville, said the math was simple for retirees like him, who live off Social Security. "If Social Security comes down or goes at the same rate, we have to find the money some other way, and at my age, I can't work," Hanebutt said. "I'm on six different medications, and medications haven't been coming down any, so I can't cut back any there."
 
When asked about COLA, Dewayne Franklin, a retiree answered, "It helps, every year, to get that little increase…That goes a long ways, that's another week's groceries."
 

Who Will This Affect?

There are about 50 million retired and disabled Americans who receive Social Security benefits. The average monthly benefit for retirees is $1,153 this year. More than 32 million people are in the Medicare prescription drug program.
 

Those in Favor of the COLA Freeze

Some people claim that all of these worries are unfounded and agree that Social Security recipients shouldn't get an increase when inflation is negative. They remind that recipients got a big increase in January after energy prices had started to fall and that recipients also received one-time $250 payments in the spring as part of the government's economic stimulus package. Because consumer prices are down from 2008 levels, Social Security recipients now have more purchasing power, even if their benefits remain the same.
 

The Future for Social Security

 
Besides this year's COLA controversy, Social Security is facing long-term financial problems. By 2016, the retirement program is projected to start paying out more money than it receives. Without changes, the retirement fund will be depleted by 2037, according to the Social Security trustees' annual report this year. President Barack Obama has said he would like to tackle Social Security next year, after Congress finishes work on health care, climate change and new financial regulations.
 
Since lawmakers are preoccupied by health care, it makes it difficult to address other tough issues. Advocates for the elderly hope that their efforts will be rewarded in October when the Social Security Administration officially announces that there won't be an increase in benefits next year. Until then, advocates for senior citizens are sending letters to senators and congressmen to voice their concerns, hoping to have this issue revisited. 
 
The National Committee to Preserve Social Security and Medicare is the main watchdog of Social Security pensions and elder rights. More information is available on its Web site.

Questions for Your Attorney

  • How will the absence of COLA and changes in Medicare payments affect my income tax situation? Do I need to do any tax planning?
  • Given changes affecting Social Security and Medicare, I'm thinking of working part-time while I can - do I need to be concerned with any issues related to my benefits and taxes?
  • Do I need to make any changes regarding my plans for retirement and estate planning given current changes to Social Security benefits and possible changes in the program in the future?

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