The news is especially good for seniors and others living on fixed incomes. When prices are lower, those incomes go farther and can purchase more. Other things held constant, it's as if someone on a fixed income received at 1.2 percent raise. Given the high and rising unemployment, falling wages, and other financial problems that many other households are facing, a 1.2 percent increase in living standards should be good news.
Instead, however, seniors are complaining because for the first time in more than 30 years, there will be no cost of living increase in Social Security payments. The real value of those payments will increase, but the nominal value will be flat.
As a group, seniors are doing better than others in this economy. In its most recent income and poverty estimates, the Census Bureau reported that the median, inflation-adjusted income for households headed by people aged 65 and over rose 1.2 percent from 2007 to 2008, while the median real income for other households fell 3.3 percent. Over the same period, the poverty rate for people 65 and over was unchanged at 9.7 percent, while the poverty rate for younger people rose and was higher (in 2008, 19 percent of children and 11.7 percent of non-elderly adults were in households below the poverty line). And, older people have near-universal health insurance coverage, while more than one out of six younger people (including one out ten children) is uninsured.
Enter the Obama administration with an expensive "solution" to a non-existent problem
President Obama on Wednesday attempted to preempt the announcement that Social Security recipients will not get an increase in their benefit checks for the first time in three decades, encouraging Congress to provide a one-time payment of $250 to help seniors and disabled Americans weather the recession.Through a quirk in the cost-of-living formula which only adjusts benefits up and never down, Social Security recipients have effectively gotten a raise. However, President Obama wants to give them another in a Mini-Me version of a stimulus package.
Obama endorsed the idea, which is expected to cost at least $13 billion, as the administration gropes for ways to sustain an apparent economic rebound without the kind of massive spending package that critics could label a second stimulus act.
The administration's proposal also raises the question of what it will do in future years. There is a good possibility that prices will remain flat for another year, leading to no cost of living adjustment next year. At that point, not only would another "emergency" increase be needed then but the increase would have to be larger to prevent nominal incomes from going down. So $250 this year could become an even larger amount next year. Also, at some point the emergency will pass, but politicians will be confronted the problem of how to cut the "temporary" increases. It's hard to see how these increases won't someday find their way into the baseline benefit calculations and become permanent.
Without a doubt, many elderly households are enduring economic hardships. However, on average, elderly households will see their living standards improve under the current cost of living formula. The average non-elderly household can't say the same. It violates every reasonable notion of fairness to ask households whose circumstances are getting worse to contribute more to households whose circumstances are getting better.
A fairer and more affordable approach would be to target assistance to the specific types of elderly households that are likely to fall through the gaps in the various cost of living formulas. An example would be households that are just coming on to Social Security this year--these households are not protected from Medicare increases. A targeted benefit for genuinely disadvantaged households can be justified. A $250 payment to all elderly households cannot.
Nevertheless, the political pressure for an unneeded hand-out is likely to prove irresistible. Kids, start saving those $5 birthday checks from Grandma and Grandpa, the government will be asking for them (and a whole lot more) in another few years.