One-time Payment in Lieu of a Social Security COLA
Released: 2010-11-12T00:00:00

Introduction

In October 2010, the Social Security Administration (SSA) announced that Social Security beneficiaries would not receive a cost-of-living adjustment (COLA) in 2011. Similarly, beneficiaries did not receive a COLA in 2010. Social Security COLAs are based on a measure of inflation reported by the Bureau of Labor Statistics (the Consumer Price Index) and a formula specified in the Social Security Act. Consumer prices reached a peak in the third quarter of 2008 but fell in subsequent months. Because the CPI-W did not regain its 2008 peak over subsequent measurement periods used to determine the COLA for 2010 and 2011, there has been no inflation adjustment to benefits for two consecutive years. Beneficiaries of other programs are also affected by the absence of a Social Security COLA. For example, the Social Security COLA triggers an increase in Supplemental Security Income, veterans' pensions administered by the Department of Veterans Affairs and railroad retirement benefits. Both the Congressional Budget Office (CBO) and the Social Security Board of Trustees project that a COLA will be payable in January 2012.

In response to the absence of a COLA for the second consecutive year, some Members of Congress and the President are again calling for a one-time payment of $250 in lieu of a COLA for Social Security beneficiaries, veterans, and others. Democratic congressional leaders have stated their intent to bring such legislation to the floor before the close of the 111 th Congress. The proposed one-time payment is viewed by supporters as a way to assist economically vulnerable individuals and as a means to stimulate the economy.

During the 111 th Congress, in response to the absence of a Social Security COLA in 2010 and 2011, a number of bills that would take different approaches have been introduced. Some measures would provide a one-time payment in lieu of a COLA (the amount of the payment would vary depending on the proposal), whereas others would provide an ad hoc COLA of a specified percentage or require the use of a different measure of inflation to compute the COLA.

This report explains how the Social Security COLA is computed under current law and discusses some of the concerns that have been raised about the Consumer Price Index, the measure on which the COLA is based, as a true measure of the cost of living, especially for the elderly. It then provides a brief summary of legislation introduced in the 111 th Congress related to the Social Security COLA issue. The report presents policy considerations regarding a one-time payment in lieu of a COLA, including the economic status of older Americans, their reliance on Social Security benefits, and the effectiveness of this type of government spending as an economic stimulus. Drawing from recent experience with the $250 economic recovery payments to Social Security and other beneficiaries provided under the American Recovery and Reinvestment Act of 2009 (ARRA; P.L. 111-5 ), the report offers points to consider with respect to the design of a one-time payment proposal, such as the scope of the eligible beneficiary population; administrative issues, including those related to improper payments; and the budget impact of such payments.

Social Security COLA

The Social Security COLA is an annual inflation-adjustment to benefits to help them maintain their purchasing power over time. Before 1972, Congress periodically increased benefits on an ad hoc basis. In 1972, Congress enacted legislation providing for automatic COLAs beginning in 1975. Since 1975, a COLA has been paid each year except 2010 and 2011.

How the COLA is Determined Under Current Law

The Social Security COLA is based on the rate of inflation as measured by the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W), which is published monthly by the Bureau of Labor Statistics (BLS). Specifically, the COLA is based on the percentage increase in the average monthly CPI-W from the third quarter of the base year (the base year is the last year for which a COLA was applied) to the third quarter of the current year. The COLA is applied (or becomes effective ) in December of the current year and is payable in January of the following year. For example, the payment that a beneficiary receives in January 2011 reflects the benefit for December 2010.

Social Security beneficiaries did not receive a COLA in January 2010 because the average monthly CPI-W fell by 2.1% from the third quarter of 2008 to the third quarter of 2009 (making 2008 the base year for computing the next COLA). Similarly, beneficiaries will not receive a COLA in January 2011 because the average monthly CPI-W fell by 0.6% from the third quarter of 2008 to the third quarter of 2010 (2008 remains the base year for computing the next COLA). The next COLA will be payable when the average monthly CPI-W for the third quarter of the current year exceeds the average monthly CPI-W for the third quarter of 2008. In August 2010, CBO and the Social Security Board of Trustees projected that the next COLA will be payable in January 2012.

If there is a decrease in the CPI-W over the measurement period (if there is a decline in prices), Social Security benefits are not reduced. Stated another way, if the change in the CPI-W over the measurement period does not result in a COLA, benefits remain flat (before deductions for Medicare Part B and Part D premiums). Figure 1 illustrates how Social Security recipients benefit in 2010 and 2011 from the current-law provision that precludes a negative COLA. In the figure, the monthly benefit amount received by the average retired worker in 2004 ($1,073 ) is increased based on the CPI-W and the current-law Social Security COLA during the period from 2005 to 2011. The impact of the provision preventing a negative COLA is shown by the top line, which remains constant from 2009 to 2011. Without the provision prohibiting a negative COLA, benefit amounts would have followed the lower dashed line (indexed to the CPI-W) in 2010 and 2011.

Interactions Between the Social Security COLA and Medicare Premiums

In the absence of a Social Security COLA, most Social Security beneficiaries will be held harmless for an increase in the Medicare Part B premium, therefore their net Social Security benefit amount will not decrease. For about a quarter of beneficiaries, however, an increase in Medicare Part B premiums may result in a net reduction to Social Security benefits. Regardless of whether a COLA is paid in a given year, beneficiaries could experience a net reduction in Social Security benefits as a result of increases in the Medicare Part D premium.

Other Social Security Provisions Affected

The absence of a Social Security COLA also affects other provisions of the Social Security program. By law, if there is no COLA, there can be no change in the amount of covered wages subject to the Social Security payroll tax (i.e., the taxable wage base, which is $106,800 in 2010). In addition, there can be no change in the exempt amounts under the Social Security Retirement Earnings Test (RET). Similarly, there can be no change in the Substantial Gainful Activity (SGA) amount for blind individuals who receive Social Security disability benefits. These program elements are adjusted annually based on the increase in the national average wage index only if there is a COLA. As a result, these program elements remain at their 2009 levels in 2010 and 2011.

Other Beneficiaries Affected by the Social Security COLA

Beneficiaries of other programs are also affected by the absence of a Social Security COLA, including low-income elderly and disabled persons, veterans, and federal civil service annuitants. Theses beneficiaries are affected because the Social Security COLA triggers an increase in another program's benefits, or the program uses the same measurement period and formula for computing the COLA as the Social Security program, or legislation is enacted each year providing a COLA for benefits paid under the program equal to the Social Security COLA. As a result, beneficiaries of the programs listed below will not receive a COLA in January 2011.

The Social Security COLA triggers an increase in benefits paid under the following programs.

Supplemental Security Income (SSI) . SSI is a means-tested program that provides monthly cash benefits to aged (65 or older), blind, or disabled persons with limited income and assets. SSI benefits are increased by the same percentage as the Social Security COLA. Veterans' Pension Benefit Programs . The Department of Veterans Affairs (VA) administers two means-tested pension benefit programs for veterans and their families: the Improved Disability Pension for certain low-income veterans and the Improved Death Pension for certain low-income surviving spouses and dependent children of veterans. VA pension benefits are increased by the same percentage as the Social Security COLA. Railroad Retirement Board (RRB) Programs . The RRB administers retirement and disability benefits for railroad workers and their families. Tier I benefits (which are equivalent to a Social Security benefit) are increased by the same percentage as the Social Security COLA. Tier II benefits (which are equivalent to a private pension) are increased by 32.5% of the Social Security COLA.

COLAs under the following programs are not triggered by the Social Security COLA; however, these programs use the same measurement period and formula for computing COLAs as the Social Security program.

Civil Service Retirement System (CSRS) . CSRS provides retirement, survivor and disability benefits to civilian federal employees hired before 1984 and their families. Benefits for CSRS retirees and survivors are adjusted annually by a COLA. Military Retirement System . The military retirement system includes monthly compensation and benefits after an active or reserve military career, disability retirement for those physically unfit to continue to serve, and survivor benefits for the eligible survivors of deceased retirees. The monthly retirement annuity is adjusted annually by a COLA.

Similarly, the following program uses the same measurement period for computing its COLA as the Social Security program, although a modified formula is used to limit the COLA.

Federal Employees Retirement System (FERS) . FERS provides retirement, survivor, and disability benefits to civilian federal employees hired in 1984 or later, as well as to federal employees who voluntarily switched from CSRS to FERS, and their families. Under FERS, the COLA is based on the percentage change in the CPI-W over the same measurement period as the Social Security COLA; however, a different formula is used which limits the COLA if the rate of inflation exceeds 2.0%. Benefits for non-disabled retirees aged 62 or older, disabled retirees and survivors are adjusted annually by a COLA.

Benefits paid to disabled veterans and to survivors of certain servicemembers and veterans under the following programs are not automatically indexed for inflation. However, Congress enacts legislation each year to provide a COLA for these benefits equal to the Social Security COLA.

Veterans' Disability Compensation . Disability compensation provides a monthly cash benefit to veterans whose disabilities resulted from injury or disease contracted in, or aggravated by, military service. The amount is based on the level of disability. Dependency and Indemnity Compensation (DIC) for Survivors . DIC provides a monthly cash benefit to survivors and dependents of servicemembers killed while on active military duty, and to survivors and dependents of certain veterans.

The Veterans' Compensation Cost-of-Living Adjustment Act of 2010 ( P.L. 111-247 , signed on September 30, 2010) provided a COLA for veterans' disability compensation as well as DIC in 2011 equal to the Social Security COLA.

The Social Security COLA as a Measure of Older Americans' Cost of Living

General Concerns About CPI Measures as True Measures of the Cost of Living

In 1996, a Senate-appointed Commission led by Michael Boskin of Stanford University reported that the Consumer Price Index (CPI) overstated inflation by an average of 1.1% per year during 1995-96. The commission, which was widely known as the Boskin Commission, attributed the upward bias in the CPI to several methodological issues, including consumers' shift to discounters and incomplete accounting for substitution among products in response to price changes. The commission attributed the largest source of upward bias in the CPI (0.6% per year) to the difficulty of adjusting the index for new products and changes in the quality of products. These methodological problems affect several of the BLS' CPI measures, including the CPI-W, the inflation measure that SSA uses to calculate the Social Security COLA.

Since the Boskin Commission released its report, BLS has made several improvements to the CPI methodology. These improvements include adjusting spending weights more rapidly to respond to changes in spending patterns, changing sampling techniques and some technical changes to the CPI formula. Work remains to be done, however, according to BLS officials and academic researchers. In particular, the methodology used to calculate the various CPI indices still fails to capture accurately the introduction of new products or changes in the quality of existing products.

The CPI-Elderly

Concern has been expressed that the CPI-W, upon which the Social Security COLA is based, may not accurately reflect the spending habits of retired and aged persons. The CPI-W tracks the spending habits of employed, urban workers, but about 80% of Social Security beneficiaries are aged 62 or over and are likely to be retired. The elderly also devote a greater share of their spending to healthcare than the rest of the population. Persons aged 65 and older spend more than twice as much of their total outlays on healthcare as does the overall population, where outlays on healthcare are defined as expenditures on health insurance premiums and out-of-pocket costs, but excluding benefits paid by employers or federal government programs. Persons aged 75 and older allocate almost three times as much of their total outlays on healthcare as the overall population.

In response to concerns about how effectively the CPI-W tracks the spending patterns of the elderly, in 1987 Congress directed BLS to introduce an experimental new index for the elderly, the CPI-Elderly (CPI-E). From 1985 to 2009, the CPI-E has risen about 0.3 percentage point more per year, on average, than the CPI-W.

BLS and some analysts argue that the experimental CPI-E currently has some technical limitations and should be used with caution. For example, CPI-E uses the same geographical areas and retail outlets as the CPI-W, although seniors may live in different geographical areas and frequent different retail outlets than the rest of the population. It has also been argued that all BLS inflation measures, including the CPI-E, understate the rate of improvement in the quality of healthcare and that incorporating healthcare quality improvements would reduce measured changes in the price of healthcare. Since most elderly have their major medical expenses covered by Medicare, their out-of-pocket healthcare expenses are generally for items such as prescription drugs, long-term care and over-the-counter healthcare items.

Comparison of the CPI-E and CPI-W

Figure 2 shows the historical performance of the CPI-E and CPI-W. Each index is represented by the third quarter average for the given year because, as discussed above, the Social Security COLA is based on the percentage increase in the CPI-W from the third quarter of the base year (the last year for which a COLA was applied) to the third quarter of the current year. As shown in Figure 2 , the CPI-E tends to grow faster than the CPI-W. From 1985 to 2010, the average annual increase in the CPI-E was about 3.1%. During the same period, the average annual increase in the CPI-W was about 2.9%. However, the CPI-E rose more slowly than the CPI-W in certain years, including 2005, 2008, and 2009.

Using the CPI-E would not have led to a COLA in 2010 or 2011, however, as Figure 2 illustrates. Both the CPI-W and CPI-E contain a component of energy prices, which peaked in the third quarter of 2008 but then fell sharply in the fourth quarter of 2008. As shown in the figure, neither the CPI-E nor the CPI-W had recovered its 2008 peak by the third quarter of 2010.

Other researchers have pointed out that using the CPI-E instead of the CPI-W would not have led to a Social Security COLA in 2010 because the CPI-E, like other inflation indices, declined from 2008 to 2009.

Legislation in the 111th Congress

A number of bills introduced in the 111 th Congress would provide a one-time payment in lieu of a COLA. These bills vary in terms of the payment amount, who would be included in the pool of eligible beneficiaries, and whether the cost of the one-time payment would be offset by other provisions. Other bills would provide a one-time, ad hoc COLA of a specified percentage. Members of Congress have also introduced several bills to require that SSA use a different inflation measure to determine the COLA, based on arguments that the CPI-W may not accurately reflect the spending patterns of the Social Security beneficiary population.

For example, H.R. 5987 (Representative Pomeroy), Seniors Protection Act of 2010, is likely to be considered before the end of the 111 th Congress. H.R. 5987 would provide a one-time $250 payment to all Social Security beneficiaries, including children and disabled beneficiaries receiving SSDI, railroad retirees, SSI recipients, and certain veterans in the event that no Social Security COLA is payable in 2011. The one-time payment would be disbursed to persons who were entitled to benefits (in the case of SSI, eligible for benefits) in any of the three months ending immediately prior to the month in which the bill was enacted and, in the case of Social Security beneficiaries, were paid a benefit in any of the 12 months ending prior to the month in which the bill was enacted. Only one $250 payment would be made to each individual, regardless of whether he or she was entitled to, or eligible for, benefits under more than one program. Payments would not be made to persons who were prisoners or aliens who were not lawfully present in the United States. The one-time payment would be disregarded for the purposes of all federal and federally-assisted programs, and would not be considered income for the purposes of taxation. Payments would be made at the earliest practicable date in 2011 prior to April 1, 2011, and no payments would be disbursed after December 31, 2011.

In October 2010, Speaker of the House Nancy Pelosi and Senate Majority Leader Harry Reid announced their support for consideration of a one-time $250 payment to Social Security and certain other beneficiaries when Congress returns after the November elections. On October 15, 2010, the White House press office announced that the President supports efforts to provide a $250 payment to seniors, veterans, and people with disabilities. Other Members of Congress have questioned the need for such a payment or indicated that they may support a one-time payment only if the legislation includes financing provisions.

Policy Considerations

This section the report discusses issues that may inform the debate on whether to provide a one-time payment to those directly affected by the Social Security COLA: the economic condition of older Americans; their dependence on Social Security benefits and their economic vulnerability in recent times; the effectiveness of this category of government spending as an economic stimulus; and the option of means testing such payments. Other issues discussed in this section include parity for certain government retirees and residents of U.S. territories, improper economic recovery payments under the American Recovery and Reinvestment Act of 2009 (ARRA), and the potential budget impact of a one-time payment.

The Economic Condition of Older Americans

Incidence of Poverty

In September 2010, the Census Bureau released new poverty data showing the effects of the recent recession. Overall, 43.6 million people in 2009 were living in poverty, up from 39.8 million in 2008, and the poverty rate increased from 13.2% to 14.3%, the highest national poverty rate since 1994. However, the aged saw a decline in their poverty rates. As seen in Table 1 , the 65 or older age group in general had poverty rates that were in absolute terms lower than those for younger age groups in both 2008 and 2009. In 2009, the aged saw their poverty rate drop by 0.8 percentage point to 8.9%. In contrast, one of the more adversely affected groups in the recent recession has been children under the age of 18 who saw their poverty rates go up from 19.0% to 20.7%.

An unusually large COLA of 5.8% was paid to all Social Security beneficiaries in January 2009, a result of a jump in energy prices in August 2008. This adjustment, based on the change in the CPI-W from July through September of 2007 to the same three month period in 2008, provided for the highest automatic increase since 1982. Prices fell in subsequent months in 2008 so that the annual CPI-W change for calendar year 2008 was somewhat lower. In other words, Social Security recipients benefitted from a one-time spike in energy prices during 2008. In addition, ARRA provided a one-time $250 payment to Social Security and SSI beneficiaries, retired railroad workers, and recipients of benefits from certain programs run by the VA. In 2009, some persons also benefitted from a Recovery Rebate tax credit on their 2008 federal income tax returns ($600 for unmarried persons, $1,200 for married couples) if they did not receive the economic stimulus payment in 2008 or their rebate was higher when calculated using their 2008 financial information. In addition, the CPI-U, which is used to index the dollar values in the official poverty thresholds, was lower in 2009 than in 2008 resulting in slightly lower poverty thresholds for 2009 than in 2008. Thus, receipt of additional income and a lower poverty threshold help explain why the 65 and older age group experienced lower poverty rates in 2009 than in 2008, unlike any other age group.

The next table highlights who among the aged are more economically vulnerable. Table 2 provides poverty rates for Social Security beneficiaries aged 65 and older in 2008. It is based on the most recent statistics published by SSA, which include Social Security beneficiaries who may be receiving retired worker benefits, dependents' or survivor benefits, disability benefits, or transitionally insured benefits. Social Security beneficiaries comprised approximately 86% of the 65 and older age group. SSA does not provide a breakdown by beneficiary type. Among all beneficiaries, those aged 80 and older have a poverty rate of 9.4%, which is 1.5 times that of the "young old," the 65-69 age group. The incidence of poverty rises with age. The disparities in poverty among the old can also be seen between men and women. The oldest women, those aged 80 and older, have markedly high poverty rates (11.8%). The rate of poverty among women aged 80 and older is almost three times that of men aged 65-69 and more than twice that of men aged 80 and older.

How Critical are Social Security Benefits?

Social Security benefits are the most common source of income for those aged 65 and older, with about 87% having received benefits in 2008. The relative importance of Social Security, or how much individuals depend on Social Security, is evident in the commonly cited statistic that, for a third of beneficiaries, these benefits constituted at least 90% of their total income.

Table 3 shows which beneficiaries depend more critically on their Social Security benefits than others. It looks at the age distribution of beneficiaries' reliance on their Social Security benefits. For measuring reliance on Social Security benefits, the Social Security Administration tabulations use beneficiary units, defined as either married couples living together in which at least one member is aged 65 or older, or non-married persons aged 65 or older. Table 3 shows that the older one gets, the greater the reliance on, or proportion of income from, Social Security benefits. Thus, the oldest among the 65 and older age group depend the most on their Social Security benefits. For more than half of the 80+ age group (50.1%), Social Security benefits are at least 80% of total income. In contrast, for only 30.2% of the 65-69 age group, these benefits are at least 80% of total income. Similarly, for about 40.2% of the 65-69 age group, these benefits are less than 40% of their total income. In other words, reliance on Social Security benefits for the 65-69 age group is far less than for the oldest group.

Overall economic resources available to older beneficiaries also vary by age. Based on data from the Social Security Administration (not shown in Table 3 ), the median household income for all 65 and older beneficiary units was $24,857 in 2008. However, more than half of the 80+ age group had incomes less than $20,000 compared with only 28% of the 65-69 age group. At the upper end of the income distribution, almost 22% of beneficiary units in the group aged 65-59 had incomes of at least $75,000 compared with only 5.8% of the oldest old.

A One-Time Payment as a Form of Economic Stimulus

Several lawmakers have proposed a one-time payment to Social Security beneficiaries as a way to stimulate demand to assist the weak economic recovery. Despite the National Bureau of Economic Research's (NBER's) announcement that June 2009 was the official end of the recent recession, current economic indicators are anemic. The unemployment rate has hovered around 9.6% for the last several months. Real (inflation adjusted) Gross Domestic Product (GDP)—the output of goods and services produced by labor and property located in the United States—increased at an annual rate of 2.0% in the third quarter of 2010 (from the second quarter to the third quarter), according to advance estimates from the Bureau of Economic Analysis. In the second quarter, output increased at an annual rate of 1.7%.

One tool available to improve the pace of economic recovery is to increase government spending on items which can be expected to boost economic activity. Government spending can take various forms: federal investments on infrastructure, goods and services, aid to state and local governments, or transfer payments to individuals to increase the income available to them. Other fiscal policy options that serve to increase demand include reducing taxes on individuals and/or firms. For a fiscal stimulus to be effective, there is consensus that it needs to be timely, well-targeted, and temporary. Thus, spending ought to be targeted at those who are liquidity constrained—those who would spend it immediately and not save it. It should be temporary to increase output (in periods of relatively low economic activity) in the short run but not increase a long run-deficit. Government spending creates additional income, which in turn creates additional spending, resulting in a cumulative impact on the economy that is a multiple of the original amount of spending. For example, extending unemployment benefits would more than likely encourage immediate spending because unemployed individuals are, in general, cash-starved and likely to spend any additional benefits received.

CBO published recent estimates on categories of government spending and other fiscal policy options that can be expected to provide such a boost to the economy. These temporary expenditures are assumed to be deficit-financed and will add to government debt in the short run. Table 4 lists the fiscal multipliers associated with several policy options. A multiplier is defined as the change in units of output (or GDP) as a result of a change in one unit of spending. Thus, a multiplier of 1.9 for government spending on unemployment benefits implies that a $1 increase in this type of spending will increase total economic activity by $1.90. The higher the multiplier, the more effective the fiscal stimulus. The ranges between the high and low values of the multiplier in the table are designed to encompass most economists' views.

As can be seen in Table 4 , the top three categories of fiscal policy options expected to have the highest impact are increasing aid to the unemployed, reducing employers' payroll taxes, and reducing payroll taxes for employers who increase their payroll. While there is much debate on the exact sizes of these multipliers, there is considerable agreement that additional government spending can work only if the recipients quickly spend the money that they receive. Therefore, additional one-time payments can generate additional demand only to the extent that the recipients spend the additional income. In their 2010 report on policy options, CBO states that many of the elderly save at rates similar to those in the working-age population, resulting in this policy having a moderate impact on output. As a result, Social Security beneficiaries are not expected to increase spending as a result of a one-time payment as much as would beneficiaries of several other government spending options. This explains why spending on unemployment benefits has a higher impact on total economic activity (higher multiplier) than a one-time payment to Social Security beneficiaries, many of whom are likely to save the additional money. The modest additional spending for providing a one-time payment in lieu of a Social Security COLA (roughly $13 billion as described in Budget Impact section later) along with the moderate expected impact (or "bang for the buck") is likely to result in a small economic stimulus.

An expansion in debt due to a fiscal stimulus is expected to increase output and employment. Once output and employment reach their full potential, fiscal restraint in the form of additional taxes or reduced spending would have to be imposed to reverse the accumulation of government debt, or future output will grow more slowly than otherwise. According to the CBO study, there is no contradiction in expanding government spending today and imposing restraint several years later. CBO estimates that the presence of large current unused capacities (underused buildings and offices, the high unemployment rate) has resulted (as of February 2010) in the nation's output being about 6% less than its full potential.

Means Testing

Means testing the one-time payment could be viewed as a way to target the payments to those in greatest financial need and to strengthen the economic stimulus effect of the payments (on the basis that low-income beneficiaries would be more likely to spend the money quickly). Table 2 and Table 3 showed that the population aged 65 and older as a group is not uniformly economically vulnerable, and certain subgroups such as those aged 80 and older are more likely to suffer economic hardship.

Although means testing a one-time payment would reduce the overall cost to the federal government, if payments were processed using data from federal tax returns, this would increase the administrative difficulties associated with the payments (e.g., some low-income beneficiaries do not file tax returns) and potentially delay the payments' arrival. In addition, lawmakers would have to determine the income threshold for a means test, which could be a contentious matter for practical and political reasons (ideally, the income threshold would be set at a level that would effectively target the payments without excluding a large share of the beneficiary population). It may be possible to approach means testing through certain low-income Medicare beneficiary categories, however, this approach has not yet been explored.

Parity for Certain Government Retirees and Residents of U.S. Territories

Federal employees who exclusively worked under CSRS and certain state and local government retirees are not eligible for Social Security benefits because they worked in jobs that were not covered by the Social Security system. Aged, blind, and disabled residents of Guam, Puerto Rico, and the U.S. Virgin Islands are not eligible for SSI benefits but may be eligible for federally funded Aid to the Aged, Blind, and Disabled (ABD) benefits administered by their territorial governments. Thus, both of these groups would not be eligible for a one-time federal payment made to all Social Security beneficiaries and SSI recipients. Extending a one-time federal payment to all government retirees who do not receive Social Security and to all territorial ABD beneficiaries may present administrative difficulties in properly identifying and paying eligible recipients.

Treatment of Certain Government Retirees and Residents of U.S. Territories Under the ARRA

The economic recovery payments authorized by the ARRA were made only to adult Social Security, railroad retirement, veterans disability beneficiaries, and all SSI recipients. Thus, CSRS, certain state and local government retirees, and aged, blind, and disabled residents of U.S. territories were not eligible for these payments.

Section 2202 of the ARRA authorized a refundable tax credit of $250, or $500 in the case of a couple filing jointly, in tax year 2009 for any local, state, or federal government retiree receiving a public pension for work not covered by Social Security and not otherwise eligible for an economic recovery payment. Because the amount of this credit was equal to the amount of the economic recovery payment authorized by the ARRA, it served to provide government retirees with a monetary benefit equivalent to that provided by the economic recovery payment. However, because this tax credit was not available until a person filed his or her 2009 tax return in 2010, these government retirees did not see this monetary benefit until several months after the economic recovery payments were made.

The ARRA did not contain a provision for any economic recovery payments or similar benefits to aged, blind, and disabled residents of Guam, Puerto Rico, and the U.S. Virgin Islands.

Improper Economic Recovery Payments Under the ARRA

A September 2010 audit report by the SSA Office of the Inspector General (SSA-OIG) found that economic recovery payments authorized by the ARRA were sent to more than 71,000 former Social Security beneficiaries and SSI recipients who were deceased and to more than 17,000 incarcerated persons and that these payments cost over $22 million. The SSA reports that it accurately issued more than 99.8% of the approximately 52 million economic recovery payments to Social Security beneficiaries and SSI recipients.

For a Social Security beneficiary or SSI recipient to qualify for an economic recovery payment under the ARRA, he or she must have been eligible for Social Security benefits as an adult or SSI benefits in any of the months of November or December 2008 or January 2009. The SSA-OIG identified 71,688 economic recovery payments that were sent to former Social Security beneficiaries or SSI recipients who had died before November 2008 and thus were not eligible under the ARRA. In 63,481 of these cases, the SSA was notified of the person's death and payments were made either because the agency was not aware of the death when it certified payment or because the SSA did not properly review its own files.

The SSA-OIG found that 17,348 prisoners and other incarcerated persons received economic recovery payments under the ARRA. However, depending on the timing of each person's incarceration, these payments may not have been improper. There are no provisions in either the ARRA or the Social Security Act that prohibit the payment of an economic recovery payment to a person who was not incarcerated during the qualifying period, but subsequently became incarcerated and was incarcerated at the time his or her economic recovery payment was issued.

The SSA and the Department of the Treasury have the authority to stop payment or reclaim any Social Security or SSI benefits paid, including those paid by electronic funds transfer, after a beneficiary's death. However, the ARRA does not grant this authority to the SSA or the Treasury Department in cases of improper economic recovery payments. Thus, although the Treasury Department can reclaim money from checks issued to deceased beneficiaries that are improperly cashed by other persons, the federal government cannot reclaim money from improper payments issued via electronic funds transfer.

Budget Impact

In some cases, those who do not support a one-time payment in lieu of a Social Security COLA cite the potential cost to the federal government, and the projected effect on the Social Security trust fund, among the primary reasons for taking no action. The estimated cost varies depending on how the proposal is structured.

Among the key factors affecting cost is the dollar amount of the one-time payment. Most proposals would provide a payment of either $150 or $250. Another key factor is the pool of eligible beneficiaries. Some proposals would provide a one-time payment to Social Security beneficiaries only, whereas others would provide a one-time payment to Social Security beneficiaries as well as beneficiaries of other federal programs in which a COLA is connected in some way to the Social Security COLA. The size of the eligible beneficiary pool would also be affected if the one-time payment were provided to all beneficiaries of the programs included (i.e., adult and child beneficiaries) or limited to adult beneficiaries only.

To address concerns about the impact of a one-time payment in lieu of a COLA on the federal budget and on the Social Security trust fund, some proposals include provisions that would offset the cost of the one-time payment. Examples of offset provisions include a temporary increase in Social Security payroll taxes for some higher-wage earners and a redirection of unobligated ARRA funds for this purpose.

Some proposals, for example, are modeled after the one-time $250 economy recovery payments provided to Social Security and certain other beneficiaries in 2009 under ARRA. Under ARRA, a one-time payment of $250 was provided to adult Social Security beneficiaries, all SSI beneficiaries, veterans' compensation and pension beneficiaries, and adult railroad retirement and disability beneficiaries. ARRA also provided a one-time $250 refundable tax credit for federal, state and local government retirees who did not otherwise qualify for an economic recovery payment. As of September 25, 2009, nearly 54.7 million economic recovery payments, totaling more than $13.6 billion, were issued by SSA, the VA, and the RRB.

SSA has published estimates of the cost of several proposals to provide a one-time payment in lieu of a COLA. For example, H.R. 3536 (Representative McCarthy) would provide a one-time payment of $150 to Social Security beneficiaries in 2010. SSA estimated that the bill would result in payments to about 50.2 million Social Security beneficiaries at a cost of $7.5 billion.

S. 1685 (Senator Sanders) would provide a one-time payment of $250 to adult Social Security beneficiaries, SSI recipients, veterans' compensation and pension beneficiaries, and adult railroad retirement and disability beneficiaries in 2010. SSA estimated that the bill would result in payments to 55.6 million individuals at a cost of about $13.9 billion, which would be offset by a revenue provision included in the bill. The companion bill in the House is H.R. 3597 (Representative DeFazio).

H.R. 5834 (Representative Deutch) would provide a payment of $250 (indexed to the CPI-E) to beneficiaries of Social Security, Supplemental Security Income, railroad retirement pensions, and veterans' disability compensation or pension benefits in each year, including 2011, that a COLA is not paid, among other provisions. SSA estimated the cost of the one-time payment in 2011 to be $13.3 billion in present value terms (or $14.2 billion in nominal terms), which would be offset by revenue provisions included in the bill.

In an October 19, 2010, letter to Senate Minority Leader Mitch McConnell, Senate Majority Leader Harry Reid, and other Democratic Senators expressed support for "$250 in emergency relief to our nation's most vulnerable senior citizens and disabled veterans to help them pay for their increased cost of living." The letter states that the estimated cost of the payments is $13 billion.

Conclusion

The announcement that there will be no Social Security COLA in 2011, for the second year in a row, has prompted some members of Congress and President Obama to call for legislative action. Besides Social Security beneficiaries, beneficiaries of several other federal programs are affected by the Social Security COLA including beneficiaries of SSI, veterans' pension benefits and railroad retirement pensions. CBO and SSA both forecast that a Social Security COLA will next be paid in 2012.

Members of Congress have introduced a number of bills in the 111 th Congress to address the absence of a Social Security COLA. The bills take various approaches. Some bills would provide a one-time payment in lieu of a COLA. Other bills would require the use of a different measure of inflation to determine the Social Security COLA or would provide a one-time, ad hoc COLA of a specified percentage. Democratic congressional leaders have stated their intent to bring legislation to provide a one-time payment to Social Security and certain other beneficiaries to the floor when Congress returns after the November elections.

Supporters of a one-time payment view it as a way to stimulate the economy. Supporters also intend the payment to assist seniors who may be vulnerable to rising healthcare costs, particularly older seniors and women.

Others argue that a one-time payment is not necessary because most beneficiaries received an unusually high COLA of 5.8% in 2009 and were protected against deflation in a subsequent period. The CPI-W remained below its 2008 peak during the measurement periods used to determine the 2010 and 2011 COLAs. Opponents also cite the budget cost of providing a one-time payment, which would vary depending on who receives the payment. In addition, some research suggests that the provision would not be an effective stimulus measure, particularly when compared to other policy options.

Appendix. The Chained CPI-U

In August 2002, BLS introduced a supplemental new index, the chained CPI-U (C-CPI-U), in response to concerns raised by the Boskin Commission about the methodology underlying the Consumer Price Index for all Urban Consumers (CPI-U). The goal of the C-CPI-U is to eliminate substitution bias, which affects the CPI-U because the latter index does not accurately capture how consumers change their buying habits in response to price changes. As a result, the CPI-U and related indices, such as the CPI-W (used as the base for the Social Security COLA), overestimate how much money is needed to maintain a constant standard of living.

BLS has issued a C-CPI-U series that begins in December 1999. Since 1999, the C-CPI-U has generally increased more slowly than the CPI-U and other BLS inflation indices. Between the third quarter of 2000 and the third quarter of 2010, the C-CPI-U increased by a total of 23.3%, the CPI-U increased 26.1%, the CPI-E increased 26.2%, and the CPI-W increased 27.5%. From the third quarter of 2008 to the third quarter of 2009, however, the C-CPI-U rose 0.9 percentage point less than the CPI-U and 0.4 percentage point less than the CPI-W.

To date, the C-CPI-U has not been incorporated into any indexing provisions of federal government programs. One difficulty with using the C-CPI-U is that it is subject to two revisions after its initial release. Depending on the month, the final C-CPI-U is not available for as long as two years after that particular month.