Social Security Gets Cost of Living Boost

WASHINGTON – The cost of living adjustment intended to help more than 47 million Social Security recipients keep up with inflation is expected to be a tad larger in 2005 than it was this year, but the bad news is that much of the increase will be eaten up by higher Medicare premiums.

The Social Security Administration was announcing the new cost of living adjustment, or COLA, Tuesday, but in advance of the release many private economists were predicting a gain of slightly better than 2.5 percent, which would be up from the increase Social Security recipients received at the beginning of this year of 2.1 percent.

While the new increase will translate into a rise in average monthly benefits of around $20, more than half of that amount will be eaten up by higher Medicare premiums.

The government announced last month that Medicare premiums will increase by a record amount in dollar terms of $11.60 per month starting in January, compared to a monthly premium increase of $7.90 this year.

Under law, no Social Security beneficiary will get lower benefits than that person is currently getting even if their Social Security cost-of-living adjustment does not cover the entire cost of the Medicare premium increase.

But advocates for the elderly said that protection still means that millions of Social Security beneficiaries at the low-end of the benefit scale will see no gain at all this year because the COLA increase will all be eaten up by the Medicare premium increase.

“That means that many people will have no ability to keep up with inflation,” said John Rother, policy director at AARP, formerly the American Association of Retired Persons.

Rother and other private economists said another problem is that the COLA will not cover the big jump in heating costs many Americans are expected to see this winter, reflecting crude oil prices that have climbed to an all-time high above $50 per barrel.

“Unless energy prices come down soon, it is going to be a tough winter for lower income households and seniors,” said Mark Zandi, chief economist at Econom.com. “Many people may have to decide between buying Christmas presents and paying their heating bill.”

The cost of living adjustments announced Thursday will go to more than 52 million people. That includes 47 million people receiving Social Security benefits and the rest receiving Supplemental Security Income payments that go to the poor.

In the closing days of the presidential campaign, Democratic challenger Sen. John Kerry is accusing President Bush of planning a surprise second-term effort to privatize Social Security, saying such a move would be a “disaster for America’s middle class.”

Kerry pointed to a Sunday New York Times Magazine story that quoted Bush as telling supporters that “privatizing Social Security” would be high on his second-term agenda. Kerry promised “I will never privatize Social Security.” The reaction from the Bush campaign was to call the published report “flat inaccurate.”

“The seniors will continue to get their checks,” Bush told the Associated Press in an AP interview. “It is wrong to try to scare people going into the polls.”

Social Security will face a funding shortfall beginning in 2018 as the demands of baby boomer retirements mean that the government’s biggest benefit program will be paying out more in benefit checks than it is collecting in payroll taxes from current workers.

While Bush campaigned in 2000 on a program to partially privatize Social Security by giving younger workers the option of diverting some of their payroll taxes into private investment accounts, he has never pushed the proposal in Congress, in large part because of the sizable transition costs that some estimate would top $1 trillion.

Monthly Social Security benefit checks have been adjusted automatically since 1975 to protect retirees’ income from erosion caused by rising inflation. The increase is tied to the change in the Consumer Price Index from the July-September quarter of one year to the same period in the next year.

When Medicare began in 1967, premiums were set at $3 per month. The $11.60 increase for next year will push monthly premiums to cover the cost of doctors’ visits and most other non-hospital expenses to $78.20, up from this year’s monthly premium of $66.60.

The premiums for doctors’ visits are updated annually under a formula set by law. The federal government picks up about 75 percent of the cost of these benefits, known as Part B of Medicare, and the beneficiaries pay the rest.