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Sunday, March 10, 2013

Social Security’s Cost-of-Living Adjustment: What Do Americans Want?

Jasmine V. Tucker, National Academy of Social Insurance

The purpose of Social Security’s cost-of-living adjustment (COLA) is to automatically adjust benefits to keep up with rising prices. Experts have long disagreed about how the COLA should be calculated and the rate at which it should grow to fully protect beneficiaries against loss of purchasing power due to inflation.

Some experts say the current COLA does not keep up with the inflation that seniors face because seniors spend more on out-of-pocket health care costs, which generally rise faster than average inflation. Other experts say that the current COLA actually overstates inflation because it does not sufficiently factor in substitution between different categories of goods. A recent survey that asked Americans whether they favor or oppose 14 different policy changes finds that Americans would prefer to increase, rather than reduce, Social Security’s COLA (see table below).

Americans’ Views on

Changing Social Security’s Cost-of-Living Adjustment (COLA)

 

Increase the COLA

Reduce the COLA

Favor

  64%

  30%

     Strongly

31

11

     Somewhat

33

19

Not Sure

26

33

Oppose

10

37

     Strongly

3

17

     Somewhat

7

20

Source: National Academy of Social Insurance Survey, September 2012

The study, Strengthening Social Security: What Do Americans Want?,also finds that Americans’ preferred package of policy changes would more than eliminate Social Security’s financing gap by increasing payroll taxes and paying for modest benefit improvements – including increasing the COLA.

Survey respondents were told that one policy option would base the COLA on a measure of inflation that seniors actually experience. To illustrate, if general inflation from one year to the next is 3%, but inflation experienced by seniors is 3.2%, this COLA for the elderly would increase a $1,000 monthly benefit by $32 instead of by $30. This change would more fully protect seniors against inflation; it would also increase Social Security’s projected financing gap by 13%. Although 26% of survey respondents said they were “not sure” about this policy option, among respondents who did have opinions, those in favor outnumber those opposed by more than 6 to 1 (64% to 10%).

Another proposal presented to survey respondents would base the COLA on a measure of inflation (the chained CPI) that would result in increasing Social Security benefits less than the current COLA does. To illustrate, if inflation from one year to the next is 3%, but a new inflation measure goes up by only 2.7%, the COLA would increase a $1,000 monthly benefit by $27 instead of $30. This change would reduce seniors’ protection against inflation, and the seemingly small difference would add up over time, so the oldest seniors would experience the biggest benefit cuts. This change would reduce Social Security’s projected financing gap by 20%. More than half (55%) of respondents who have an opinion about reducing the COLA are opposed to it, and many are strongly opposed.

For more information about the COLA, see two of NASI’s fact sheets:

Posted on March 10, 2013  |  Add your comment
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Good for NASI for keeping on top of this. But it is deeply depressing that you should have to do so. After all, who is surprised by these findings? Anyone with common sense and a decent set of values would come to the same conclusions. It's not that the American people are ahead of their leaders. It's that the leaders are so obsessed with ideology and political gamesmanship that neither facts nor public opinion are relevant to them. In general, American political elites have become increaingly removed from both accountability and reality in recent decades. For both Congress and the Administration it has become a sign of virtue to cut Social Security, and neither wants to be bothered by the facts. When major policy issues are decided on this basis the nation is on a short road to disaster. So good luck to NASI. I hope someone is listening. At least you've tried.
For these issues laid bare to us by NASI, I commend them. We face social problems like a real man, but unlike animals, we have beautiful ways of looking at poverty, we deal with numbers, stats, we look at human problems in grim figures
I have 2 questions on this study:

Does the tax increase cover the costs on the SSDI cost problem as well as the retirement problem?

The proposed payroll tax increase from 12.4% to 14.4% to 16.4% is quite steep. Did the survey ask whether the added tax would be preferred when the costs for the Medicare, Medicaid, and Obamacare will need to be funded by increased taxes or benefit cuts or some combination of the two? In other words, do survey participants believe that this tax increase is the only tax increase they will be facing or did the survey force them to choose which program they would prefer their taxes to fund.
Ed,

Thank you for your questions.

First, the tax increase we asked respondents about covers the entire OASDI system, including both retirement and disability.

Second, please see Appendix B of the full report for the information provided to and questions asked of the respondents. We did not address issues related to Medicare, Medicaid, or the ACA in the survey.

If you have additional questions, please don't hesitate to call our office: 202-452-8097.

Jasmine

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