Social Security to start cashing Uncle Sam's IOUs

In the March 14, 2010 article "Social Security to start cashing Uncle Sam's IOUs," Associated Press writer Stephen Ohlemacher reports the Social Security system will pay out more in benefits than it collects in revenues this year. As baby-boomers increasingly shift from working and paying into the system to retiring and collecting benefits, this problem will exacerbate:

PARKERSBURG, W.Va. – The retirement nest egg of an entire generation is stashed away in this small town along the Ohio River: $2.5 trillion in IOUs from the federal government, payable to the Social Security Administration.

It's time to start cashing them in.

For more than two decades, Social Security collected more money in payroll taxes than it paid out in benefits — billions more each year.

Not anymore. This year, for the first time since the 1980s, when Congress last overhauled Social Security, the retirement program is projected to pay out more in benefits than it collects in taxes — nearly $29 billion more.

Sounds like a good time to start tapping the nest egg. Too bad the federal government already spent that money over the years on other programs, preferring to borrow from Social Security rather than foreign creditors. In return, the Treasury Department issued a stack of IOUs — in the form of Treasury bonds — which are kept in a nondescript office building just down the street from Parkersburg's municipal offices.

Now the government will have to borrow even more money, much of it abroad, to start paying back the IOUs, and the timing couldn't be worse. The government is projected to post a record $1.5 trillion budget deficit this year, followed by trillion dollar deficits for years to come.

Social Security's shortfall will not affect current benefits. As long as the IOUs last, benefits will keep flowing. But experts say it is a warning sign that the program's finances are deteriorating. Social Security is projected to drain its trust funds by 2037 unless Congress acts, and there's concern that the looming crisis will lead to reduced benefits.

"This is not just a wake-up call, this is it. We're here," said Mary Johnson, a policy analyst with The Senior Citizens League, an advocacy group. "We are not going to be able to put it off any more."

For more than two decades, regardless of which political party was in power, Congress has been accused of raiding the Social Security trust funds to pay for other programs, masking the size of the budget deficit.

Remember Al Gore's "lockbox," the one he was going to use to protect Social Security? The former vice president talked about it so much during the 2000 presidential campaign that he was parodied on "Saturday Night Live."

Gore lost the election and never got his lockbox. But to illustrate the government's commitment to repaying Social Security, the Treasury Department has been issuing special bonds that earn interest for the retirement program. The bonds are unique because they are actually printed on paper, while other government bonds exist only in electronic form.

They are stored in a three-ring binder, locked in the bottom drawer of a white metal filing cabinet in the Parkersburg offices of Bureau of Public Debt. The agency, which is part of the Treasury Department, opened offices in Parkersburg in the 1950s as part of a plan to locate important government functions away from Washington, D.C., in case of an attack during the Cold War.

One bond is worth a little more than $15.1 billion and another is valued at just under $10.7 billion. In all, the agency has about $2.5 trillion in bonds, all backed by the full faith and credit of the U.S. government. But don't bother trying to steal them; they're nonnegotiable, which means they are worthless on the open market.

More than 52 million people receive old age or disability benefits from Social Security. The average benefit for retirees is a little under $1,200 a month. Disabled workers get an average of $1,100 a month.

Social Security is financed by payroll taxes — employers and employees must each pay a 6.2 percent tax on workers' earnings up to $106,800. Retirees can start getting early, reduced benefits at age 62. They get full benefits if they wait until they turn 66. Those born after 1960 will have to wait until they turn 67.

Social Security's financial problems have been looming for years as the nation's 78 million baby boomers approached retirement age. The oldest are already there. As that huge group of people starts collecting benefits — and stops paying payroll taxes — Social Security's trust funds will shrink, running out of money by 2037, according to the latest projection from the trustees who oversee the program.

The recession is making things worse, at least in the short term. Tax receipts are down from the loss of more than 8 million jobs, and applications for early retirement benefits have spiked from older workers who were laid off and forced to retire.

Stephen C. Goss, chief actuary for the Social Security Administration, says the crisis has been years in the making. "If this helps get people to look more seriously at that in the nearer term, that's probably a good thing. But it's only really a punctuation mark on the fact that we have longer-term financial issues that need to be addressed."

In the short term, the nonpartisan Congressional Budget Office projects that Social Security will continue to pay out more in benefits than it collects in taxes for the next three years. It is projected to post small surpluses of $6 billion each in 2014 and 2015, before returning to indefinite deficits in 2016.

For the budget year that ends in September, Social Security is projected to collect $677 million in taxes and spend $706 million on benefits and expenses.

Social Security will also collect about $120 billion in interest on the trust funds, according to the CBO projections, meaning its overall balance sheet will continue to grow. The interest, however, is paid by the government, adding even more to the budget deficit.

While Congress must shore up the program, action is unlikely this year, said Rep. Earl Pomeroy, D-N.D., who just took over last week as chairman of the House subcommittee that oversees Social Security.

"The issues required to address the long-term solvency needs of Social Security can be done in a careful, thoughtful and orderly way and they don't need to be done in the next few months," Pomeroy said.

The national debt — the amount of money the government owes its creditors — is about $12.5 trillion, or nearly $42,000 for every man, woman and child in the country. About $8 trillion has been borrowed in public debt markets, much of it from foreign creditors. The rest came from various government trust funds, including retirement funds for civil servants and the military. About $2.5 trillion is owed to Social Security.

Good luck to the politician who reneges on that debt, said Barbara Kennelly, a former Democratic congresswoman from Connecticut who is now president of the National Committee to Preserve Social Security and Medicare.

"Those bonds are protected by the full faith and credit of the United States of America," Kennelly said. "They're as solid as what we owe China and Japan."
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On the Net:
Social Security Administration: http://www.socialsecurity.gov/
Trustees' reports: http://www.ssa.gov/OACT/TR/
National Committee to Preserve Social Security and Medicare: http://www.ncpssm.org/
The Senior Citizens League: http://www.seniorsleague.org/
Bureau of Public Debt: http://www.publicdebt.treas.gov/
Congressional Budget Office: http://tinyurl.com/ydgrl5d

Social Security makes it official: No cost of living adjustment (COLA) in 2010

In the October 15, 2009 article "No Social Security COLA could prod $250 payments," Associated Press writer Stephen Ohlemacher reports:

WASHINGTON – Social Security recipients won't get a cost-of-living increase next year for the first time in more than a third of a century, and that could boost President Barack Obama's plan to send seniors another round of $250 payments before the congressional elections.

Democratic leaders in Congress have signed onto the plan, greatly improving its chances, even as some budget hawks say the payments are unwarranted and could add to the federal budget deficit. Republican leaders said they, too, favor the payments but don't want to increase the deficit to pay for them.

More than 50 million Social Security recipients will see no increase in their monthly payments next year, the government said Thursday, the first year without an increase since automatic adjustments were adopted in 1975.

Blame it on falling consumer prices. By law, cost-of-living adjustments are pegged to inflation, which is negative this year because of lower energy costs. Social Security payments do not go down, even when prices drop.

Social Security recipients at a senior center in Pembroke Pines, Fla., a suburb of Fort Lauderdale, took it in stride that come January they won't see an increase in their benefits.

"At my age, I've got a nice bedroom, I have clothes, I have anything I want, I got a walker, what else do I need?" said Marie Arrasate, 83, who ran a restaurant and candy shop with her husband in Washingtonville, N.Y., and now lives with her daughter in Pembroke Pines.

"You have to make do with whatever you get. What are you gonna do? You can't do nothing about it," said Ed Nunez, 69, a retired truck driver from Miami.

The White House said the stimulus payments would cost $13 billion, though a congressional estimate put the cost at $14 billion. Obama didn't say how the payments should be financed, leaving that up to Congress. The president is open to borrowing the money, increasing the federal deficit, just as Congress did with the first round of stimulus payments.

Government analysts have been forecasting for months that there would be no increase next year in monthly Social Security payments because of falling consumer prices. In anticipation of Thursday's announcement, Obama said Wednesday he supported $250 payments to about 57 million senior citizens, veterans, retired railroad workers and people with disabilities.

Seniors groups applauded the proposal, saying the recession has reduced home values and diminished retirement funds. Recipients would be limited to one payment, even if they qualified in more than one category.

"Without relief, millions of older Americans will be unable to afford skyrocketing health care and prescription drug costs, as well as other basic necessities," said Tom Nelson, chief operating officer for AARP.

The payments would match the ones issued to seniors earlier this year as part of the government's economic recovery package. They would be equal to about a 2 percent increase for the average Social Security recipient.

Social Security has been the backbone of the nation's safety net for older Americans since it was enacted in the 1930s. Together with Medicare, the government health insurance program for the elderly, it helps keep millions of seniors out of poverty.

The poverty rate for U.S. residents 65 and older is below the rates for other age groups and has been for much of the past two decades. In 2008, the rate for seniors was 9.7 percent, according to the Census Bureau. That same year it was 11.7 percent for 18-to-64-year-olds and 19 percent for minors.

The average monthly Social Security payment for all recipients is $1,094.

Some Social Security experts say recipients shouldn't get a raise or an extra payment next year because their purchasing power has already increased with falling consumer prices.

They note that Social Security payments increased by 5.8 percent this year, the biggest rise since 1982, largely because of a spike in energy prices in 2008.

Over the past 12 months, gasoline prices have fallen 29.7 percent, and overall energy costs have decreased 21.6 percent, the Labor Department said Thursday. Consumer prices in general have declined 2.1 percent since the third quarter of 2008. The cost-of-living adjustment for Social Security, or COLA, is based on the change in consumer prices from the third quarter of one year to the next.

"The real purchasing power of their benefits is actually higher today than it was last year," said Andrew Biggs, a former deputy commissioner at the Social Security Administration and now a resident scholar at the American Enterprise Institute.

"Nevertheless, there will be a big political price to pay if no COLA is granted," Biggs said.

Obama's proposal has picked up support from key members of Congress, including Senate Majority Leader Harry Reid, D-Nev., and House Speaker Nancy Pelosi, D-Calif. House Republican leader John Boehner of Ohio said he wanted to use unspent funds from last year's stimulus legislation to offset the cost.

Advocates for seniors argue that they deserve a raise because they spend a disproportionate amount of their incomes on health care costs, which rise faster than other consumer prices.

"Any senior living in the real world knows that the cost of living has gone up over the last year," said Sen. Charles Schumer, D-N.Y.

Obama's plan also picked up an endorsement from Social Security Commissioner Michael J. Astrue, who was appointed to a six-year term by former President George W. Bush.

The lack of a monthly increase in payments triggers several provisions in the law. Among them, the amount of wages subject to Social Security payroll taxes will remain unchanged. The first $106,800 of a worker's earned income is currently subject to the tax.

Also, Medicare Part B premiums for the vast majority of Social Security recipients will remain frozen at 2009 levels. However, premiums for the Medicare prescription drug program, known as Part D, will increase.

Social Security strained by early retirements

In the September 27, 2009 article "Social Security strained by early retirements," Associate Press writer Stephen Ohlemacher reports:

WASHINGTON – Big job losses and a spike in early retirement claims from laid-off seniors will force Social Security to pay out more in benefits than it collects in taxes the next two years, the first time that's happened since the 1980s.

The deficits — $10 billion in 2010 and $9 billion in 2011 — won't affect payments to retirees because Social Security has accumulated surpluses from previous years totaling $2.5 trillion. But they will add to the overall federal deficit.

Applications for retirement benefits are 23 percent higher than last year, while disability claims have risen by about 20 percent. Social Security officials had expected applications to increase from the growing number of baby boomers reaching retirement, but they didn't expect the increase to be so large.

What happened? The recession hit and many older workers suddenly found themselves laid off with no place to turn but Social Security.

"A lot of people who in better times would have continued working are opting to retire," said Alan J. Auerbach, an economics and law professor at the University of California, Berkeley. "If they were younger, we would call them unemployed."

Job losses are forcing more retirements even though an increasing number of older people want to keep working. Many can't afford to retire, especially after the financial collapse demolished their nest eggs.

Some have no choice.

Marylyn Kish turns 62 in December, making her eligible for early benefits. She wants to put off applying for Social Security until she is at least 67 because the longer you wait, the larger your monthly check.

But she first needs to find a job.

Kish lives in tiny Concord Township in Lake County, Ohio, northeast of Cleveland. The region, like many others, has been hit hard by the recession.

She was laid off about a year ago from her job as an office manager at an employment agency and now spends hours each morning scouring job sites on the Internet. Neither she nor her husband, Raymond, has health insurance.

"I want to work," she said. "I have a brain and I want to use it."

Kish is far from alone. The share of U.S. residents in their 60s either working or looking for work has climbed steadily since the mid-1990s, according to data from the Bureau of Labor Statistics. This year, more than 55 percent of people age 60 to 64 are still in the labor force, compared with about 46 percent a decade ago.

Kish said her husband already gets early benefits. She will have to apply, too, if she doesn't soon find a job.

"We won't starve," she said. "But I want more than that. I want to be able to do more than just pay my bills."

Nearly 2.2 million people applied for Social Security retirement benefits from start of the budget year in October through July, compared with just under 1.8 million in the same period last year.

The increase in early retirements is hurting Social Security's short-term finances, already strained from the loss of 6.9 million U.S. jobs. Social Security is funded through payroll taxes, which are down because of so many lost jobs.

The Congressional Budget Office is projecting that Social Security will pay out more in benefits than it collects in taxes next year and in 2011, a first since the early 1980s, when Congress last overhauled Social Security.

Social Security is projected to start generating surpluses again in 2012 before permanently returning to deficits in 2016 unless Congress acts again to shore up the program. Without a new fix, the $2.5 trillion in Social Security's trust funds will be exhausted in 2037. Those funds have actually been spent over the years on other government programs. They are now represented by government bonds, or IOUs, that will have to be repaid as Social Security draws down its trust fund.

President Barack Obama has said he would like to tackle Social Security next year.

"The thing to keep in mind is that it's unlikely we are going to pull out (of the recession) with a strong recovery," said Kent Smetters, an associate professor at the University of Pennsylvania's Wharton School. "These deficits may last longer than a year or two."

About 43 million retirees and their dependents receive Social Security benefits. An additional 9.5 million receive disability benefits. The average monthly benefit for retirees is $1,100 while the average disability benefit is about $920.

The recession is also fueling applications for disability benefits, said Stephen C. Goss, the Social Security Administration's chief actuary. In a typical year, about 2.5 million people apply for disability benefits, including Supplemental Security Income. Applications are on pace to reach 3 million in the budget year that ends this month and even more are expected next year, Goss said.

A lot of people who had been working despite their disabilities are applying for benefits after losing their jobs. "When there's a bad recession and we lose 6 million jobs, people of all types are going to be part of that," Goss said.

Nancy Rhoades said she dreads applying for disability benefits because of her multiple sclerosis. Rhoades, who lives in Orange, Va., about 75 miles northwest of Richmond, said her illness is physically draining, but she takes pride in working and caring for herself.

In June, however, her hours were cut in half — to just 10 a week — at a community services organization. She lost her health benefits, though she is able to buy insurance through work, for about $530 a month.

"I've had to go into my retirement annuity for medical costs," she said.

Her husband, Wayne, turned 62 on Sunday, and has applied for early Social Security benefits. He still works part time.

Nancy Rhoades is just 56, so she won't be eligible for retirement benefits for six more years. She's pretty confident she would qualify for disability benefits, but would rather work.

"You don't think of things like this happening to you," she said. "You want to be in a position to work until retirement, and even after retirement."
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On the Net:
Social Security retirement planner: http://www.ssa.gov/retire2/retirechart.htm

No Increase for Social Security

In the September 24, 2009 SmartMoney article "Social Security's New Math," Lisa Scherzer reports that Social Security payments in 2010 will not have the usual cost of living increase:

Come January 2010, seniors may do a double take after seeing their Social Security checks. The two to three percentage-point increase in benefits they usually get each year won’t be there.

That’s because, for the first time in three decades, there likely won’t be a cost of living adjustment (COLA). “People notice when their checks don’t change, says Bruce Meyer, a professor at the University of Chicago’s Harris School of Public Policy.

In the context of degraded home prices and investment losses, the change will feel like a loss to many seniors, even though benefit amounts for 2010 won’t shrink. Social Security benefits are adjusted every year to keep up with inflation, so that seniors can retain their purchasing power. Adjustments are based on the consumer price index for urban wage earners (CPI-W) between the third quarter (July-September) of the previous year and the third quarter of the current year. The 2010 COLA will be based on a period marked by sharp drops in prices and deflation.

Democratic lawmakers are trying to lessen the perceived pain. Rep. Carolyn McCarthy (D., N.Y.) introduced legislation last week that would provide a one-time $150 payment for Social Security beneficiaries to compensate for the lack of an adjustment.

Still, anxious seniors should keep in mind that they will actually come out ahead of inflation. “In a sense, older people are going to do fine because the cost of living is down and they’re not going to have their benefits cut,” says John Laitner, the director of the Retirement Research Center at the University of Michigan.

Here is the good and bad about a flat COLA.

Reasons to Fret

Next COLA increase will be in 2012: Not only won’t seniors receive an adjustment for 2010, but the Social Security and Medicare Trustees project no cost of living adjustment for 2011 and only a modest 1.4% increase in 2012. That means seniors won’t see higher payments until 2012. Of course, the Trustees report is a forecast, and next year’s report, which will take into account new data, could be revised.

Rising health-care costs: Older people get hit more by rising health-care costs than younger people do, says Pamela Herd, an associate professor of public affairs and sociology at the University of Wisconsin. That’s because seniors are disproportionate users of the health-care system and pay about 20% higher out-of-pocket health care costs than does the rest of the population. So while inflation hasn’t really been a concern, health-care costs are increasingly eating into seniors’ Social Security checks.

Higher Medicare premiums for some: Medicare Part B premiums have increased almost every year to keep pace with the growth in Part B expenditures. (Part B insurance helps pay for some services not covered by Part A, generally on an outpatient basis.)

For most of the 42 million Part B beneficiaries, the amount of the monthly Social Security COLA each year has been more than enough to offset the increase in the Part B premium – resulting in net increases in benefits, according to the Kaiser Family Foundation. But next year and in 2011, about 8% of Part B beneficiaries will be subject to higher premiums, sums that will be deducted from their Social Security payments. According to Kaiser, they'll pay $104.20 a month in 2010 and $120.20 in 2011, up from $96.40 this year.

On the Upside

The benefit bump: Social Security beneficiaries got an atypically large 5.8% increase in benefits in 2009 – the biggest in more than 25 years. That outsize increase was primarily because of 2008’s spike in oil prices, says Laitner. But since then the CPI increase was lost as energy prices fell. It was an excessively high COLA that raised the purchasing power of seniors’ benefits, actually putting them “ahead where they should be,” says Andrew Biggs, a resident scholar at the American Enterprise Institute, a nonprofit public policy group.

Seniors are better off than most: While the poverty rate increased from 2007 to 2008 and median household income fell, both indicators remained statistically unchanged for people 65 and older, according to last week’s Census report. “So the official data say that group is doing quite well – and all those numbers predated the 5.8% increase in Social Security benefits” this year, says Meyer of the University of Chicago.

What You Need to Know About Social Security

In the September 17, 2009 Money magazine article "What You Need to Know About Social Security," Walter Updegrave explains:

This benefit should be the cornerstone of your retirement planning. The answers to these five questions will help you to get the most out of it.

You've probably spent a lot of time sweating over your 401(k) and IRA. But have you given much thought to the way Social Security will fit into your retirement plans?

You should. In fact, Social Security provides 50% of the income for more than half of married retired couples and about 20% for high earners. Moreover, it's the only source of income you're likely to have that's guaranteed to last for life and keep pace with inflation.

But given the complexity of the Social Security calculations, it's tough to figure out how to make the most of it. The amount of your monthly check will depend on when you retire, how much you and your spouse earned, and whether you work in retirement. "That makes it hard to plan," says former Social Security Administration deputy commissioner Andrew Biggs. The following guide will answer those questions and give you strategies that can help you maximize your benefits.

QUESTION 1: Can I count on Social Security to be there?

You can. Despite what you may hear about the system going broke, the funds from workers' payroll taxes will cover all retirees' payments until 2016 even if no changes are made to the current program. After that the Social Security Administration can cover full benefits until 2037 by cashing in its Treasury bonds from the Social Security trust fund. And when the bonds run out, income from payroll taxes would be enough to cover about 75% of payments for decades.

That said, the government is looking at ways to shore up the system. President Obama has talked about imposing Social Security payroll taxes on income over $200,000 (currently, earnings over $106,800 are exempt). Other possible fixes: upping payroll taxes, raising the retirement age, and scaling back payments in some way.

The good news for anyone in or near retirement: "People 55 and over are likely to see no change or just a marginal change in benefits," says actuary Bruce Schobel, who worked on the commission headed by Alan Greenspan nearly 30 years ago that fixed the system (at least until now). But even younger workers can rest assured that drastic cuts are unlikely.

QUESTION 2: How much will I get every month?

Like all things Social Security, there's a complex formula involved. But essentially, the amount you'll get at your full retirement age is based on your average lifetime earnings, adjusted for rising wage levels over the years. Depending on when you were born, your full retirement age varies between 65 and 67. Grab your payments earlier than your full retirement age, and they'll be reduced: Wait, and you'll get more.

Spouses can also qualify for up to 50% of their husband or wife's full retirement age payment; if that amount is larger than what you would get based on your own earnings, you'll get the higher figure. Similarly, if your spouse dies, you would receive a survivor's benefit of up to 100% of what your deceased spouse was collecting, if that amount is higher than your own payment. Divorced? You may still be eligible for spouse and survivor benefits as well.

Your checks are also automatically adjusted for inflation each January. Payments increased by 5.8% for 2009. But given the near-term inflation outlook, the Congressional Budget Office estimates there may not be a cost of living increase for the next few years.

QUESTION 3: At what age should I begin collecting?

The majority of people take Social Security before full retirement age. But it often pays to wait. Just in terms of benefits accrued, if you have an average life expectancy or better, you'd probably come out ahead waiting for a larger payment that you won't collect as long. More important, you'll have a bigger check at an age when your retirement savings are diminished and you aren't likely to be able to work to supplement your income.

The math gets more complicated for married couples, however, since in addition to what they get from their own earnings, one of them may also qualify for spousal benefits and eventually collect payments as a surviving spouse. So married couples should aim to max out their benefits over both their lifetimes.

Generally, the best strategy is for the higher-earning spouse to delay taking Social Security for as long as possible. That's because survivor benefits are based on the larger of the couple's checks. The lower-earner, meanwhile, should usually claim benefits earlier. That will often, though not always, provide the greatest amount of income as well as security in old age.

QUESTION 4: Will I lose benefits if I work?

It's true that if you collect early and work at the same time, your payments may be reduced (once you reach full retirement age, feel free to toil away; your golf game might suffer, but there's no effect on your Social Security). Your checks will be reduced by $1 for every $2 you earn over an annual limit, currently $14,160 (the hit is considerably less during the calendar year you hit full retirement age).

But despite what you often read or hear, you don't actually "lose" that money. At full retirement age Social Security will begin compensating you with a larger check for the benefits that were withheld. And you'll receive that higher payment for the rest of your life. If you are reasonably long-lived, you'll wind up collecting more -- and you'll have extra income from your additional years as a wage slave.

Working in retirement can also up your payments in other ways. Your check is based on your 35 highest years of wages. If you work fewer during your career, your benefit will be adjusted to reflect any extra years of work. Even if you clocked all 35 years pre-retirement, you could still get a bump if your annual earnings during your golden years were higher than some years earlier in your career.

QUESTION 5: Will my benefits be taxed?

You thought Uncle Sam would cut you a break after retirement? Fat chance. Currently, about a third of Social Security recipients pay income tax on a portion of their benefits, and the Social Security Administration projects upwards of 42% of recipients will be doing so by 2018.

To see whether you'll owe taxes and, if so, to estimate what the bill might be, use our simplified worksheet ("Add up the tax bill," above, right) or fill out the extremely detailed one in IRS Publication 915: Social Security and Equivalent Railroad Retirement Benefits, available at irs.gov.

If you want to lessen the tax bite, there are a couple of options. One is to wait at least until full retirement age to claim Social Security, if you think that income from a post-retirement job could result in a big tax bill.

Another way to avoid taxes is to pull money from a Roth IRA instead of a traditional IRA or 401(k). That's because Roth withdrawals don't count as income in figuring whether your benefits are taxable. So if you don't already have money in a Roth, you may want to fund one or convert some of your traditional IRA to a Roth. After all, in retirement, you're likely to need all the cash you can get.

Millions face shrinking Social Security payments

According to the August 23, 2009 article "Millions face shrinking Social Security payments," Associated Press writer Stephen Ohlemacher says:

WASHINGTON – 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 (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 heads 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 health care 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 health care, where costs rise faster than inflation. Many also have suffered from declining home values and shrinking stock portfolios just as they are relying on those assets for income.

"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 percent 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 go from $28 this year to $30 next 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.

There is no such hold-harmless provision for drug premiums.

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 percent 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 subjected to Social Security taxes, Kennelly said. Workers only pay Social Security taxes on the first $106,800 of income, a limit that rises each year with the average national wage.

But the limit only increases 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.

President Barack Obama has said he would like tackle Social Security next year, after Congress finishes work on health care, climate change and new financial regulations.

Lawmakers are preoccupied by health care, making it difficult to address other tough issues. Advocates for older people hope their efforts will get a boost in October, when the Social Security Administration officially announces that there will not be an increase in benefits next year.

"I think a lot of seniors do not know what's coming down the pike, and I believe that when they hear that, they're going to be upset," said Sen. Bernie Sanders, an independent from Vermont who is working on a proposal for one-time payments for Social Security recipients.

"It is my view that seniors are going to need help this year, and it would not be acceptable for Congress to simply turn its back," he said.
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On the Net:
Social Security Administration: http://www.ssa.gov/
National Committee to Preserve Social Security and Medicare: http://www.ncpssm.org

25. Entitlement programs, such as Social Security, Medicare, and Medicaid, will become an increasing portion of federal government spending.

25. The future of entitlement programs, such as Social Security, Medicare, and Medicaid, will be important, controversial economic issues in our lifetimes. An entitlement program is a government program that provides benefits to a group that meets established criteria. Social Security is the federal government entitlement program designed to ensure that elderly and disabled Americans and their dependents have enough income to buy the necessities of life. Medicare is the federal government entitlement program that pays medical bills for elderly Americans. Medicaid is the federal government entitlement program that pays medical bills for low-income Americans.

The retirement of the baby boom generation may have a substantial effect on the U.S. economy. There was a significant increase in the number of births in North America from 1946 to 1964. People born in 1946 will reach age 65 in 2011. As baby-boomers retire, there will be a significant decrease in the number of people paying into the system (through payroll taxes) and a significant increase in the number of people collecting entitlement program benefits. This will require either an increase in revenues, a reduction in social benefits, or further increases in the public debt, which pass these obligations to future generations. This topic is further discussed in module 10 (Fiscal Policy).