Chained COLAs and the Battle over Social Security
December 19, 2011 · By Salvatore Babones
The supercommittee shouldn't have considered this unreasonable, unprincipled, and unfair cost-cutting plan.
Like something out of a bad movie, the failed congressional supercommittee plotted to use "chained COLAs" to cut future Social Security benefits for America's retired workers.
No, chained COLA isn't some kind of carbonated beverage gone bad. It's a new way to calculate cost of living adjustments that will reduce Social Security benefits more and more every year. It represents the ultimate triumph of theory over reality.
The supercommittee's basic idea was that when prices go up, you cut back on consumption. When the price of gasoline went up from $3.00 to $3.60 a gallon, you probably started driving less. You had to. You couldn't afford gas at $3.60 a gallon.
To anyone who knows how to do percentages, when prices went up from $3.00 to $3.60 a gallon, they went up 20 percent. If you want to keep driving like you used to, it's going to cost you 20 percent more than it used to. It's that simple.
It's not that simple to the economists who want to cut Social Security. They argue that when prices went up to $3.60 a gallon, you bought less gas. Maybe you took the bus more than you used to. Either way, you didn't buy the same amount of gas that you bought before.
And since you responded by buying less gas, they reasoned, you don't need a full cost of living adjustment for the price of gasoline. You only need a cost of living adjustment for the gas you still buy. Raise the price of gas to a million dollars a gallon, and you won't need a cost of living adjustment at all. You'll just give up driving.
Using the chained COLA idea to cut future Social Security benefits would have been an even bigger disaster than the supercommittee itself. On the day you retire, your Social Security benefits are fixed forever. After that date you only get cost of living adjustments to account for inflation. You don't get any additional income beyond that.
Learning how to live on a fixed income for the rest of your life is hard enough. With the chained COLA system, you'd have to learn how to adjust your lifestyle every year the way government economists expect you to. If the price of gas goes up 20 percent, for example, they'll figure out what you could buy instead of gasoline and adjust your COLA accordingly.
Of course, it's not quite that simple. Everyone has different consumption habits and buys different things. The current method for making cost of living adjustments assumes that everyone consumes just like the average consumer. That's not perfect, but it's worked well enough for almost 100 years now.
The chained COLA method uses an economic model to figure out how people could better spend their money so that they can remain just as well off even though prices have gone up. It's unreasonable, unprincipled, and unfair. The supercommittee considered it for one reason and one reason only: to cut future Social Security payments.
Social Security isn't in trouble. As it is, people and companies only pay Social Security taxes on wages under $106,800 for each employee. Wages over $106,800 and income from investments aren't even subject to Social Security taxes.
If Social Security ever runs into trouble, people making over $106,800 a year can pay Social Security taxes on all their income, just like the rest of us. Congress should keep away from Social Security — or find ways to increase its payments.
Our lawmakers shouldn't balance the budget on the backs of America's retired workers.