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Tuesday, November 16, 2010

One-time Payment in Lieu of a Social Security COLA

Sharmila Choudhury
Section Research Manager

Dawn Nuschler
Specialist in Income Security

Alison M. Shelton
Analyst in Income Security

Scott Szymendera
Analyst in Disability

In October 2010, the Social Security Administration announced that Social Security beneficiaries will not receive a cost-of-living adjustment (COLA) in 2011 for the second consecutive year. The COLA is based on a formula in the Social Security Act and the change in prices as measured by the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). Because consumer prices reached a peak in 2008 and have not regained that peak over the measurement periods used to determine the COLA for 2010 and 2011, Social Security benefits remain flat at their 2009 levels. Stated another way, beneficiaries are protected against a negative COLA that would reduce benefits.

Beneficiaries of other federal programs are also affected by the absence of a Social Security COLA, including Supplemental Security Income, veterans’ pensions administered by the Department of Veterans Affairs, and benefits administered by the Railroad Retirement Board. Beneficiaries of these programs also will not receive a COLA in 2011. Recent projections suggest that the next Social Security COLA may be payable in January 2012.

A number of bills have been introduced that would provide a one-time payment in lieu of a COLA. For example, H.R. 5987 (Representative Pomeroy), Seniors Protection Act of 2010, which is likely to be considered before the end of the 111
th Congress, would provide a one-time payment of $250 to Social Security and certain other beneficiaries. Other bills would provide an ad hoc COLA of a specified percentage or require the use of a different measure of price change to determine the COLA. Alternative measures of price change, such as the experimental Consumer Price Index for the Elderly (CPI-E), are proposed on the basis that the CPI-W may not accurately reflect the spending patterns of the Social Security beneficiary population, especially the elderly who tend to allocate a greater share of their total spending to healthcare than the rest of the population. If the CPI-E had been used in place of the CPI-W to compute the COLA, it would not have resulted in a COLA in 2010 or 2011.

The proposed one-time payment is viewed by supporters as a way to assist economically vulnerable individuals, especially the “oldest old” and women who tend to have higher poverty rates. Others point out, however, that the population aged 65 and older as a group is not uniformly economically vulnerable. They also argue that a one-time payment is not necessary because beneficiaries received an unusually high COLA in 2009 (5.8%) and were protected against deflation in a subsequent period. The CPI-W has remained below its 2008 peak during the measurement periods used to determine the 2010 and 2011 COLAs.

Supporters of a one-time payment also view it as a means to stimulate the economy. Estimates from the Congressional Budget Office show that a one-time payment to Social Security beneficiaries ranks behind other categories of government spending (including spending on unemployment benefits) that can be expected to encourage immediate spending and provide a boost to the economy. Means testing the one-time payment could help to target it more effectively, creating a stronger economic stimulus effect. Others express concern regarding the budget impact of a one-time payment in lieu of a COLA.

Experience related to the $250 economic recovery payments to Social Security and certain other beneficiaries in 2009 under P.L. 111-5 can provide insight into potential administrative issues, including those related to improper payments, and other considerations.

Date of Report: November 12, 2010
Number of Pages: 24
Order Number: R41488
Price: $29.95

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