Thursday, April 18, 2013

Debt Ceiling: COLA vs Chained COLA

In May of this year, just a few short weeks away, Congress is going to debate the debt ceiling once again. They are apparently also going to tackle one aspect of Social Security and that is the Cost of Living Adjustment as part of the entitlement talks in the debt ceiling debate.

The term for this is one we’ll be hearing about shortly and it may be part of our lexicon before summer even arrives. It is chained cost of living.

To explain this would be very boring and not easily understood. I’ve been reading about it for days and it’s a bear to understand. However, this example may make it a bit easier to understand and not be quite as boring. This really is an oversimplification of the way it works and will work if this passes, but hopefully I’m explaining it well enough to make it easier to understand.

First of all, Cost of Living or COLA is figured annually. So the number will change from year to year. If you look at the history of Social Security, you’ll see that the average COLA since 1938 is 2.8% per year. However, some years paid more and some years there was none. For instance, in 1980 the COLA was 14.3%. So you know there were years that it was at zero.

The Cost of living is figured by looking at urban wage earners and clerical workers spending habits. The cost of bread, milk, meat, gasoline and housing to name a few. If the cost is higher this year than it was last, COLA rises. If it’s basically the same, there is no increase.

The Chained Cost of Living will change one of the parameters. Instead of using the urban wage earners and clerical, it will use the elderly. The elderly is a smaller sampling of the population of this country than urban wage earners and clerical. That’s one drawback.

The elderly don’t use as much as those still young and working. Food for instance. They don’t eat as much and they save money. They are on a fixed income. So where you may go to the store and buy a loaf or two of bread for $1.78 each, they will buy an off brand for $1.00. They get less slices, less quality and spend less because again, they don’t eat as much.

A younger person will likely have a family and maybe buy a couple of gallons of milk in a weeks time where a retiree might get a half gallon of milk per week and again, buy the off brand because it’s cheaper

Then there is housing. A house worth $100,000 a couple of years ago may have lost 50%-60% of it’s value making it now worth $40,000-$50,000. How many elderly buy brand new houses? Not many. Their houses are paid for, or they’ve sold them and moved into smaller homes, cheaper homes or even gone to renting.

So while younger people will spend money to take care of their families and even waste money on junk food or things they don’t really need, but have just in case, the elderly are more frugal.

All of these factors and more will cause the increases to Social Security from COLA to be lower. So those on Social Security will get a lower increase in the years that there is an increase.

There is one other factor that is less mentioned but still out there. Social Security’s increase with the COLA is figured on the current amount you’re drawing from Social Security. Under the new system, it will be added to the amount you began with.

Here’s an example. You started drawing Social Security at age 62. You’re now 65. You have been getting an increase to your social security the past two years due to COLA. So you’re check at age 64 went up by 3.6% and this year it went up by 1.7% over last years figures because of COLA.

If we were under the Chained COLA your cost of living would be based on the amount you began drawing Social Security that first year. So if you started drawing Social Security at age 62 and you were receiving $1,000 per month, and got a 2% COLA increase, your check would be for $1,020 at age 63, and then they’d figure next years COLA on the $1,020. But if we’re under the Chained COLA, if you got that $20.00 increase the first year, the next year when they figure the Chained COLA they will figure it based on $1,000, not the $1,020 that you’re now receiving.

That may not seem like much of a difference now, but what happens ten years from now? Instead of receiving $1,400 per month after ten years of COLA, you’re now receiving $1,100 because of the Chained COLA.

Social Security was originally designed to be a supplement to whatever you’d done for your own retirement. But it’s evolved over the years and is now designed to keep a retiree above the poverty level. The Chained COLA could easily keep that from happening.

There are changes that could be made to make Social Security more solvent, but do we have to do it at the expense of our seniors?

You’re welcome to comment.



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