Podcast: Why There Won’t Be a COLA in 2011

In this podcast, we’ll discuss the news that seniors won’t receive a cost-of-living-adjustment to their Social Security benefits this year. I’m Shannon Spillane and I’m joined by Paul Van de Water, Senior Fellow here at the Center.

1. Paul, last Friday the government announced there will be no cost-of-living-adjustment, or COLA, in Social Security payments for the coming year. What is a COLA and how is it calculated?

Every January, the federal government adjusts Social Security benefits to keep up with the changing prices of goods and services. These adjustments are called cost-of-living-adjustments. They’re based on the federal government’s standard consumer price index, or CPI, which measures the prices of goods and services that a typical consumer buys.

When prices go up, Social Security benefits go up. For example, in January 2009, Social Security beneficiaries received an increase of 5.8 percent — the biggest COLA in more than 25 years – because prices had risen significantly through late in the previous year.

Prices fell sharply after that, however, and they’re still below their summer 2008 peak. As a result, there was no COLA in January 2010, and there won’t be one in January 2011.

2. Is it unusual for there to be no cost-of-living adjustment for Social Security recipients?

This is only the second time this has happened since cost-of-living-adjustments began in 1975. The good news is that there’s no such thing as a negative COLA. That is, when prices fall, the government doesn’t cut Social Security benefits.

3. And, beneficiaries are also protected from other potentially negative consequences of not having a COLA. Can you explain?

Sure, Shannon. Most elderly and disabled Social Security beneficiaries participate in Medicare and they pay premiums for supplemental Medicare, called Part B, which helps pay for doctors’ services and outpatient care. And most opt to have those premiums deducted from their monthly Social Security checks. Part B premiums would normally rise in 2011 in tandem with increases in the program’s costs. But, because there will be no Social Security COLA, federal law will also freeze the Medicare premiums. This protects the vast majority of beneficiaries from any decline in their monthly check.

4. When will there be another cost-of-living-adjustment?

The Social Security trustees, who follow these trends, expect that there will be a small COLA in January 2012.

Thanks for joining me, Paul.