Social Security recipients: Don't count on a raise in 2016
Retirees, many of whom continue to struggle with dismal yields on deposit accounts, bond funds, annuities and other conservative investments, should prepare for a bit more bad news: Social Security benefits probably won't include a cost-of-living increase next year.
The Social Security Administration has been paying COLAs, or cost-of-living adjustments, to help protect against inflation since 1975 and didn't offer a yearly increase in just two other years. But 2016 seems destined to join 2010 and 2011 as the third year of no increases.
Persistently low inflation is the culprit. Social Security pays yearly increases on retirement benefits and those for Supplemental Security Income — which goes to low-income people over 65 and blind and disabled individuals — assuming the government's inflation measures rise over the preceding year. Social Security COLAs are pegged by law to CPI-W, which measures the consumer price index for all urban wage earners and clerical workers. It's a slightly different measure than the more recognizable CPI-U, for all urban consumers.
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The inflation measurement for 2016 will be based on the third quarter of 2014 compared with the third quarter of 2015. That means the Social Security Administration hasn't yet announced whether there will be a COLA, or how big, for next year — official word won't come until the latter part of October, after the Bureau of Labor Statistics reports on September inflation. But with just one month to go, a COLA seems unlikely: CPI-W over the 12 months through August was slightly negative, down 0.3%. If a COLA does somehow materialize, it will be minuscule.
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Social Security last October announced a COLA of 1.7% increase for 2015, payable starting in January. That pushed up the typical retirement benefit by $22 a month, from $1,306 to $1,328. The annual report by the trustees of the Social Security Administration foresees annual COLAs averaging a modest 2.7% or so for the next several years. The peak Social Security COLA increase was 14.3% in 1980, during an era of unusually high inflation.
Every time the Social Security Administration releases its COLA numbers for the coming year, it seems to revive debate on how best to measure inflation. As noted, CPI-W is the gauge required by law to be used for this purpose. But the Bureau of Labor Statistics has said it considers CPI-U to be a more appropriate measure, applicable to a wider swath of the population, including retirees. It's also the measure used to index federal income-tax brackets. The two indicators aren't greatly dissimilar, but they use somewhat different weights for the thousands of consumer items tracked.
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Although low COLAs make things tougher for retirees, they relieve some financial stress for Social Security overall, as high COLAs would worsen the system's solvency outlook. This year's report from the Social Security trustees sees the program's reserve funds running dry by 2034, with projected tax revenue sufficient to pay about three-fourths of benefits after that.
Murky campaign issue
Politicians in Washington eventually will need to address Social Security's solvency problems, and this topic occasionally emerges as a defining issue in presidential-election campaigns. But it hasn't happened yet this time around. Of the 20-plus declared Republican and Democrat candidates, only six have outlined specific proposals on the federal retirement program, says the Tax Foundation.
Republicans Rand Paul and Mike Huckabee would eliminate the payroll taxes that support Social Security and Medicare, replacing them with other funding sources — a federal sales tax in Huckabee's case. Jeb Bush would exempt workers older than 67 from payroll taxes, while fellow GOP contender Chris Christie would do the same for workers over 62 and under 25, according to the Tax Foundation.
On the other side, Democrats Bernie Sanders and Martin O'Malley would apply Social Security payroll taxes on higher incomes — taxes currently apply on the first $118,500 in individual income, though all wages are subject to payroll taxes supporting Medicare. Together, the two payroll taxes represent a sizable 23% of all federal, state and local taxes paid by Americans each year, according to the Tax Foundation. The group's analysis of candidate positions on payroll and other taxes can be seen at taxfoundation.org.
Social Security's financing challenges aren't insurmountable, but last-minute fixes likely will prove more painful than adjustments made gradually over many years. "Taking action sooner rather than later will permit consideration of a broader range of solutions and provide more time to phase in changes so that the public has adequate time to prepare," the six trustees said in their report.
Reach Wiles at russ.wiles@arizonarepublic.com or 602-444-8616.