Social Security
It's widely acknowledged that Social Security faces significant challenges. The latest projection by Social Security's Board of Trustees (May 2012) reveals that the program's annual costs will exceed payroll tax revenues in 2012, continuing a trend which began last year. While total revenues (including tax receipts and interest on the Social Security Trust Fund) will keep the fund's balance growing until 2021, program costs will grow quickly beyond this income stream, and the combined Old Age and Survivors Insurance and Disability Insurance trust funds will be depleted by 2033. This forecast is worse than those from recent years, and the options available to meet this funding shortfall and maintain the program's current benefit structure are limited and pose an enormous challenge to congressional policymakers.
In last year's report, the Trustees stated, "The projected trust fund shortfalls should be addressed in a timely way so that necessary changes can be phased in gradually and workers and beneficiaries can be given time to adjust to them." We still have time to act and achieve this result. From my point of view, it is necessary that Social Security reform be accomplished by consensus and not be the work of one political party or the other. Again quoting from the Trustee's Report Overview, "With informed discussion, creative thinking, and timely legislative action, Social Security can continue to protect future generations." I still believe that this is true.
President Obama's National Commission on Fiscal Responsibility and Reform
On February 18, 2010, President Obama signed an executive order establishing the National Commission on Fiscal Responsibility and Reform ("the Commission"). This Commission was charged with "identifying policies to improve the fiscal situation in the medium term and to achieve fiscal sustainability over the long run." In practice, the Commission was to look at existing government policies concerning spending and revenue, produce a report containing recommendations for reducing the federal budget gap, and vote on that report by December 1, 2010.
The required report was authored by the Commission's two co-chairs, former White House Chief-of-Staff Erskine Bowles and former U.S. Senator Alan Simpson, and contained recommendations for savings within Social Security. In doing so, this report went to great length to assure the public that its Social Security proposals were designed to eliminate Social Security's 75 year financial shortfall and not to reduce deficits generated by other government activities.
The proposal offers a varied approach to the problem. Among its suggestions are an alteration of the retirement benefit formula to make Social Security more progressive establishing a minimum Social Security benefit to fight poverty among senior citizens, a new enhanced benefit for very old retirees to combat the tendency of individuals to outlive their income, a gradual increase in the full retirement age and the early retirement age (69 and 64, respectively) with a hardship exception for early retirement at 62 for those working in physically demanding occupations, a gradual increase in the maximum wage taxed to cover 90 percent of all wages by 2050, and the adoption of an improved measure of inflation which more accurately reflects the way Americans respond to price increases.
On December 3, 2010, the Commission voted on the proposal offered by its two co-chairs. Under the rules established by the executive order which created the Commission, the support of 14 of the 18 members was needed to send the report to Congress. A majority supported the proposal, but the 11 - 7 vote did not meet the bar set by President Obama. For this reason, this report, including its section concerning Social Security, was not submitted to Congress for a vote.
Social Security COLA
Each year, the Social Security Administration adjusts benefits upward if there is an actual increase of the consumer price index (CPI-W) during the third quarter over the most recent high point of this third quarter measure. In 2010, the CPI-W figure for the third quarter of 2010 remained lower than that for 2008. Under current law, no COLA can be granted in this situation. 2011 is the second straight year that no COLA will be provided. (Members of Congress also have not received a COLA since 2009.)
Most economists agree that this circumstance is the result of an anomaly caused by high energy prices during the third quarter of 2008. You will recall that the price of oil peaked at over $145 per barrel during the summer and fell to just over $35 per barrel in January 2009. This increase contributed significantly to high inflation during 2008, resulting in a 2009 COLA of 5.8 percent. That was the largest COLA since 1982. The drop in oil prices and the weak economy had the opposite effect on inflation, explaining why the CPI-W figure ended last year's third quarter lower than it was in 2008.
Some have called for a legislative response to this situation. On December 8, 2010, the House considered H.R. 5987, the Seniors Protection Act of 2010, using a procedure requiring a two-thirds majority for passage. Under this legislation, Social Security recipients, Supplemental Security Income beneficiaries, railroad retirees, and veterans receiving disability compensation or a pension would be provided with a lump sum payment of $250 because of the absence of a COLA in 2011. H.R. 5987 failed to pass by the required two-thirds majority and was defeated by a vote of 254 -153, with Rep. Petri voting in favor of this bill.
A determination regarding a 2012 COLA will not be made until after the 3rd quarter 2011 CPI figures are known. For the first quarter of 2011, the CPI was above the third quarter 2008 level. If this trend continues, there will be a COLA, but it is important to keep in mind that a drop in prices between now and the end of the 3rd quarter could change this status.