Explore Freedom

Explore Freedom » COLAs Reveal the True Nature of Social Security

FFF Articles

COLAs Reveal the True Nature of Social Security

by

The more than 63 million Americans who receive Social Security retirement, disability, survivorship, or death benefits will not be getting a Christmas gift later this year from the Social Security Administration. Although those Americans have come to expect a cost-of-living adjustment (a COLA) to their Social Security benefits at the beginning of every new year, no such increase (there has never been a decrease) will be forthcoming at the beginning of 2016, says the Social Security Administration.

What the Social Security Administration did not say, what liberals and Democrats did not say, what progressives, centrists, and moderates did not say, and what conservatives and Republicans did not say is that Social Security COLAs reveal the true nature of the Social Security system.

The purpose of a COLA is to ensure that Social Security benefits keep pace with inflation. Before 1975, Congress would pass legislation to provide annual increases to Social Security benefits. But since 1975, the Social Security Administration bases benefit increases on concomitant increases in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). The Index is calculated on a monthly basis by the Bureau of Labor Statistics. The law requires that the average CPI-W for the third quarter of the previous year be compared with the average CPI-W for the third quarter of the current year to determine the percentage increase (if any) of the COLA paid in the following year.

A COLA increases a person’s Social Security retirement benefit by approximately the amount of the COLA times the benefit amount. Like everything the federal government does, it is more complicated than that. As explained by the Social Security Administration,

Each Social Security benefit is based on a “primary insurance amount,” or PIA. The PIA in turn is directly related to the primary beneficiary’s earnings through a benefit formula. It is the PIA that is increased by the COLA, with the result truncated to the next lower dime.

To get from the PIA to the benefit amount,

  1. A factor is applied to the PIA to account for early or delayed retirement, with the result truncated to the next lower dime.
  2. Any offset to the benefit, such as payment of the Medicare Supplementary Medical Insurance (SMI) premium, is subtracted.
  3. Finally, the resulting amount is truncated to the next lower dollar.

So when a COLA is issued, the PIA is first increased and then the new benefit amount is calculated. The increase in the new monthly benefit may therefore be somewhat different from the actual COLA.

The base average for 2014 is 234.242. But because the average for the third quarter of 2015 is 233.278, there is no increase in the CPI-W from 2014 to 2015 and, consequently, no COLA to increase the PIA for Social Security recipients for 2016.

This was only the third time in history that no COLA was given to Social Security recipients. (The years 2010 and 2011 were the other years that saw no COLA.) COLAs have ranged from a high of 14.3 percent in 1980 to a low of 1.3 percent in 1986 and 1998.

So how do COLAs reveal the true nature of the Social Security system?

Sometimes COLAs are granted and sometimes they are not. The amounts of the COLAs when they are granted differ widely. Congress can change the way COLAs are determined. It can arbitrarily enact a COLA of any amount. It can delay implementation of a COLA. It can eliminate COLAs altogether — something that has been touted as a reform measure to “save” Social Security. But there is no connection between the taxes one pays into the Social Security system and the benefits that one receives from the Social Security system.

Social Security is “funded” by a payroll tax deduction of 12.4 percent, split evenly between employers and employees, on wages up to $118,500. Benefits are based on the average of a worker’s 35 highest years of earnings (up to a particular year’s wage base), adjusted for inflation. The maximum benefit for a worker retiring at full retirement age is $2,663 a month. The average monthly benefit for all retired workers is $1,328. But there is no connection between the taxes one pays into the Social Security system and the benefits that one receives from the Social Security system.

Most Americans believe that they are entitled to Social Security benefits because they have “earned” them. Most Americans believe that Social Security is a government retirement program instead of a government welfare program like Medicaid, TANF, food stamps, WIC, and refundable tax credits. But there is no connection between the taxes one pays into the Social Security system and the benefits that one receives from the Social Security system.

And it is not just COLAs that reveal the true nature of the Social Security system:

  • Congress can change the tax rate at any time.
  • Congress can change the retirement age at any time.
  • Congress can change the way it calculates benefits at any time.
  • Congress can change the way it taxes benefits at any time.

According to Title XI, section 1104, of the Social Security Act, “The right to alter, amend, or repeal any provision of this Act is hereby reserved to Congress.”

The Social Security Administration even says that “the law governing benefit amounts may change because, by 2034, the payroll taxes collected will be enough to pay only about 79 cents for each dollar of scheduled benefits.”

It is only libertarians who are telling the truth about the Social Security system. Liberals, conservatives, Democrats, centrists, Republicans, moderates, and progressives all agree that the Social Security system needs to be saved for future generations of Americans.

The terrible truth that only libertarians are telling is that no one is entitled to Social Security benefits. Social Security benefits are not earned. The fact that COLAs may or may not be given — that benefits paid out have no connection with taxes paid in — reveals the true nature of the Social Security system.

Social Security will not change in 2016, but not because no COLA was issued for 2016. It will not change because it is still an intergenerational, social-engineering, income-transfer, wealth-redistribution, welfare program, as it has been since it was instituted as part of Roosevelt’s New Deal.

  • Categories