Social Security checks may shrink in 2010

Millions of older people face shrinking Social Security checks next year, the first time in a generation that payments would not rise.

The trustees who oversee Social Security are projecting there won’t be a cost of living adjustment, or COLA, for the next two years. That hasn’t happened since automatic increases were adopted in 1975.

By law, Social Security benefits cannot go down. Nevertheless, monthly payments would drop for millions of people in the Medicare prescription drug program because the premiums, which often are deducted from Social Security payments, are scheduled to go up slightly.

“I will promise you, they count on that COLA,” said Barbara Kennelly, a former Democratic congresswoman from Connecticut who now is chief executive of the National Committee to Preserve Social Security and Medicare. “To some people, it might not be a big deal. But to seniors, especially with their healthcare costs, it is a big deal.”

Cost of living adjustments are pegged to inflation, which has been negative this year, largely because energy prices are below 2008 levels.

Advocates say older people still face higher prices because they spend a disproportionate amount of their income on healthcare, whose costs have risen faster than inflation.

“For many elderly, they don’t feel that inflation is low because their expenses are still going up,” said David Certner, legislative policy director for AARP. “Anyone who has savings and investments has seen some serious losses.”

About 50 million retired and disabled Americans receive Social Security benefits. The average monthly benefit for retirees is $1,153 this year. All beneficiaries received a 5.8% increase in January, the largest since 1982.

More than 32 million people are in the Medicare prescription drug program. Average monthly premiums are set to rise to $30 in 2010 from $28 this year, though they vary by plan. About 6 million people in the program have premiums deducted from their monthly Social Security payments, according to the Social Security Administration.

Millions of people with Medicare Part B coverage for doctors’ visits also have their premiums deducted from Social Security payments. Part B premiums are expected to rise as well. But under the law, the increase cannot be larger than the increase in Social Security benefits for most recipients.

Kennelly’s group wants Congress to increase Social Security benefits next year, even though the formula doesn’t call for it. She would like to see either a 1% increase in monthly payments or a one-time payment of $150.

The cost of a one-time payment, a little less than $8 billion, could be covered by increasing the amount of income subject to Social Security taxes, Kennelly said. Workers pay Social Security taxes only on the first $106,800 of income, a limit that rises each year with the average national wage.

But the limit increases only if monthly benefits increase.

Critics argue that Social Security recipients shouldn’t get an increase when inflation is negative. They note that recipients got a big increase in January -- after energy prices had started to fall. They also note that Social Security recipients received one-time $250 payments in the spring as part of the government’s economic stimulus package.

Consumer prices are down from 2008 levels, giving Social Security recipients more purchasing power, even if their benefits stay the same, said Andrew G. Biggs, a resident scholar at the American Enterprise Institute, a Washington think tank.

“Seniors may perceive that they are being hurt because there is no COLA, but they are in fact not getting hurt,” Biggs said. “Congress has to be able to tell people they are not getting everything they want.”

Social Security is also facing long-term financial problems. The retirement program is projected to start paying out more money than it receives in 2016. Without changes, the retirement fund will be depleted in 2037, according to the Social Security trustees’ annual report this year.