Q: I read a story in the paper that said Social Security recipients might not get a cost-of-living raise next year because inflation is supposedly low. I count on my Social Security increase every year. What can you tell us about this?
A: The law says “no inflation, no Social Security COLA.” (COLA stands for “cost of living adjustment,” the annual inflationary boost included in January Social Security checks.) But don’t start pinching pennies yet. I think we’re in for a wild political ride. More on that ride in a minute. But first, a little history.
Prior to 1972, Social Security recipients received COLAs only by act of Congress. Those increases were sporadic, usually once every five years or so. But when they came along, they were whoppers, in the 20 percent range, because a lot of inflationary catch-up was needed.
In 1972, Congress decided to make COLAs automatic. Of course, they had to base the COLAs on something, so they chose to tie the increases to the consumer price index, i.e., the inflation index.
(There has been intense debate over the years whether or not the CPI accurately reflects the inflation rate for senior citizens. Some contend the CPI overstates inflation for seniors because it includes mortgage costs, which they claim many older folks do not have because they live in homes that are already paid for. Others contend that the CPI does not adequately measure the high health care costs that seniors face, so they believe it understates inflation for most Social Security recipients. But these are arguments for another column. The point you need to understand for now is that Social Security COLAs are based on the CPI.)
So when inflation goes up in one year, folks on Social Security automatically get a corresponding annual raise the following year. Since there has always been some increase in inflation every year, people on Social Security have gotten used to getting their annual hike in benefits. And I think a lot of Social Security recipients started thinking of the increase as an earned right, as opposed to an inflationary adjustment.
And proof of this -- together with a hint of the political maneuvering about to come -- happened in the mid-1980s. You see, the original automatic COLA law said folks on Social Security would get an increase matching the consumer price index only if the CPI went up more than 3 percent per year. Back in the 1970s when the law was enacted, yearly inflation was always in the 8 percent to 10 percent range, so that didn't seem to be a problem.