Since the automatic Cost of Living Adjustments (COLAs) went into effect in 1975, for the first time ever there will not be one in 2010 for more than 57 million Americans. To put that in perspective, it’s helpful to remember that just the year before Social Security recipients enjoyed the highest COLA (5.8 percent) since 1982. As such, how do you decide when, if, and how much to allocate to a COLA in any particular year? Current law provides for an automatic increase each year when there is an increase in the CPI-W (Consumer Price Index for Urban Wage Earners and Clerical Workers). That index is measured from the third quarter of last year to the third quarter of this year. Note that when you look to see if the index rose for a possible 2011 COLA, the starting point will still be at the third quarter of 2008.
The system remains fundamentally at risk over the long-term due to Social Security beneficiaries living longer and fewer workers coming behind them to pay into the system. Every year, the trustees for Social Security issue a report which suggests ways in which the system might be made stronger for all. In fact, if no real action is taken before the funds are exhausted somewhere around 2037, the changes that will be necessary will involve much more pain. Fairness is always an issue in social entitlement programs and Social Security is no different.
What might be involved in decisions that reflect integrity and still get the job done?
More than likely some version of the current trustees’ recommendations will include:
- Increasing payroll taxes and reducing benefits and tax benefits more and making transfers from general revenues.
- Taking some funds from all these sources sooner rather than later makes the pain per payment source much less than waiting. If the time value of money ever mattered (and it always matters), it matters here to all of us.
Early next year, the Financial Planning Association® will introduce a Web-based tool that will enable users to see how various solutions to fixing Social Security affects the trust fund. The tool will be available on the Financial Planning Association’s Web site in the coming months.
Bonnie Hughes, CFP®
American Capital Planning, LLC
Reston, VA / Miami, FL