Social Security COLA Is Back for 2012

October 21, 2011 at 11:30 am

It’s official:  recipients of Social Security (as well as SSI and certain other programs) will get a 3.6 percent cost-of-living adjustment (COLA) in January 2012.  For most enrollees, higher Medicare premiums will offset some of that increase, but other enrollees will actually see their premiums decline.  COLAs preserve the purchasing power of elderly or disabled beneficiaries and are a crucial part of the safety net — something policymakers should recognize as they debate tying benefit levels to a different measure of inflation.

This will be the first COLA in those programs since January 2009.  Led by high energy prices, overall consumer prices peaked in the summer 2008 and then fell sharply.  Fortunately for recipients, their benefits didn’t go down even when prices fell.  Now that prices have surpassed their summer 2008 level, COLAs will resume.

Social Security benefits are modest, averaging a bit over $1,000 a month.  For the average retired or disabled worker or widow, the upcoming COLA will mean a benefit increase of about $40 a month.  And for most beneficiaries, Social Security is the only income they’ll get that’s guaranteed to last their lifetime and to keep pace with inflation.

Most Social Security beneficiaries over 65 — and most disabled beneficiaries under 65 — participate in Medicare and have Part B premiums withheld from their checks.  While the Part B premiums for 2012 won’t be announced for another few weeks, we expect that for the vast majority of beneficiaries, their COLA will more than offset any premium increase.

Here’s why:  a hold-harmless provision prevents enrollees from getting a smaller Social Security check as a result of an increase in Part B premiums; because there has been no COLA for three years, that provision has kept premiums flat since 2009 for about three-quarters of enrollees.  But the law still requires total Medicare premiums paid by all enrollees to cover one-fourth of Part B costs — which means that the rest of enrollees have paid extra.  The resumption of COLAs will spread the costs more evenly.

If the Medicare trustees’ projections hold true, beneficiaries whose premiums have remained frozen since 2009 (at $96.40) will pay $106.60 next year.  That $10 increase is far less than the average $40 boost from the COLA.  And people who didn’t qualify for that freeze — chiefly those who enrolled in 2010 and 2011 and upper-income enrollees — will actually pay slightly lower premiums next year.

The Social Security COLA is based on the Consumer Price Index for Urban Wage and Clerical Workers (CPI-W).  Fiscal commission co-chairs Erskine Bowles and Alan Simpson, as well as the Domenici-Rivlin deficit panel, have urged policymakers to adopt the so-called “chained CPI,” which many economists think is a better measure of inflation.  CBPP has been sympathetic to this idea, so long as it applies to the tax code as well as benefit programs and includes a modest benefit increase for people after they have received benefits for many years.

Other advocates have urged legislators instead to use the experimental CPI for the elderly (CPI-E), which generally gives more weight to changes in the cost of medical care and housing and less weight to food, transportation, and education and communication.

How much difference would these alternative indexes make?  Over the last ten years, COLAs would on average have been 0.3 percentage points lower using the chained CPI and no different using the CPI-E (see table).  Over time, then, all three indexes have told a similar inflation story.  Linking COLAs and tax-code parameters to the chained CPI — with the protections mentioned above — merits a place in a balanced deficit-reduction package.

Average Cost-of-Living Adjustment Using . . .
Last 20 years 2.6% n.a. 2.7%
Last 10 years 2.5% 2.2% 2.5%
Last 5 years 2.3% 2.0% 2.1%
Upcoming COLA 3.6% 3.4% 2.9%

Helping States Better Understand Budget Choices

October 21, 2011 at 10:26 am

To understand how a proposed state policy change — say, expanding or restricting Medicaid eligibility — would affect the state’s budget, policymakers and the public need to know the cost of simply continuing the program in its current form, after adjusting for factors like inflation and demographic changes.  Yet only 22 states plus the District of Columbia (see map) produce the document needed to make this comparison, called a “current services baseline.”

Fewer Than Half of States Prepare Current Services Baselines

Our new report explains how a current service baseline improves the state budget process, summarizes current state practices, and explains how states without such a baseline could design one.

A current services baseline provides a reality check in the budget process.  It gives an honest assessment of the state’s overall fiscal health by enabling policymakers to see if the state will likely have enough resources to maintain services at current levels — or possibly expand them.

It helps legislators and the public understand whether a proposed funding level for a given program would expand the program, shrink it, or keep it at its current level.  And it can improve government efficiency by providing a regular, thorough examination of each program’s costs.

Finally, a current services baseline can enable the state to implement sensible budget controls such as PAYGO (pay-as-you-go), which requires lawmakers to offset the costs of legislated spending increases or revenue reductions compared to a baseline.  For more on how states could implement PAYGO, see this recent CBPP study.

Congress Targeting Housing Assistance for Especially Deep Cuts

October 20, 2011 at 3:42 pm

Operating within the 2011 Budget Control Act’s tight spending limits, Congress is making difficult decisions about which programs to cut in fiscal year 2012.  House and Senate leaders drafting the Department of Housing and Urban Development (HUD) budget have committed to preserving rental assistance for the low-income families now receiving it so that these families don’t lose their homes.  Yet the House and Senate funding bills do not meet this important commitment, as I explain in a new report, and tens of thousands of families could lose assistance.

Here’s the background.  The Budget Control Act requires Congress to cut total spending in non-security discretionary programs — a budget category that includes low-income housing assistance — by about 5 percent in 2012.  Yet a HUD spending bill that a House subcommittee approved last month, and a separate one that the full Senate will vote on this week, cut the HUD budget by considerably more (see graph).  Indeed, the House and Senate bills would reduce the HUD budget to the lowest levels since 2003 and 2001, respectively, in inflation-adjusted terms.

Housing Cuts to HUD Budget Are Disproportionately Deep

Read more…

Douglas Rice

Jared Bernstein and Chuck Marr Discuss a Tax Holiday for Overseas Corporate Profits

October 20, 2011 at 12:11 pm

Congress is considering a temporary “repatriation tax holiday” that would allow corporations to bring their overseas profits back to the United States at a fraction of the normal corporate tax rate.  Proponents claim that corporations would then invest these earnings in the United States, but the evidence shows that a tax holiday would fail to boost the economy while increasing deficits and encouraging companies to locate jobs and future investments overseas.

In this video, CBPP’s Jared Bernstein and Chuck Marr discuss the proposal and its likely harmful impact.  Previously, Chuck Marr has written about the issue here, here, and here.

Higher Taxes on Wealthy Won’t Drive New Yorkers Away

October 19, 2011 at 5:01 pm

New York’s highest-income residents will see their taxes fall at the end of this year in part because of the governor’s misplaced fear that unless this happens, they’ll flee the state.

New York imposed a temporary surcharge on incomes over $200,000 ($300,000 for couples) several years ago to help close large budget shortfalls resulting from the recession and its aftermath.  But that surcharge is set to expire at the end of December, in the middle of the fiscal year, and lawmakers have thus far opted to let it end, even though the state’s budget woes continue.  This was a big part of the reason why the state made deep cuts to public services in the current budget, including a $1.3 billion cut in aid for local school districts.

With an additional $2 billion budget shortfall projected for next fiscal year, starting April 1, extending the surcharge would help to prevent this year’s deep cuts from getting even deeper.  The Assembly speaker, Sheldon Silver, has proposed extending the surcharge only for incomes over $1 million, and a poll released this week found that 72 percent of New Yorkers back the idea.

Governor Cuomo, however, has refused to consider any extension, arguing that high-income people and businesses would simply move to other states.  “We have competitors.  You can move from New York to Connecticut, you can move to New Jersey,” he said recently.

As we’ve pointed out, this “tax flight” argument is a myth — the evidence doesn’t support Cuomo’s claim that higher taxes will drive the wealthy out of a state.

In fact, perhaps the most carefully designed study on the impact of tax increases on state-to-state migration focuses on neighboring New Jersey’s 2004 tax increase on filers with incomes over $500,000.  It found that at most, 70 filers earning more than $500,000 might have left New Jersey between 2004 and 2007 because of the tax increase, costing the state an estimated $16.4 million in revenue — a drop in the bucket compared to the state’s estimated $3.77 billion revenue gain from the tax increase.

Extending the current tax rate on New York’s highest earners won’t lead to an exodus of the rich.  Instead, it will bring in significant, badly needed revenue, helping to sustain services like education that are essential to maintaining residents’ quality of life.