Wednesday, October 28, 2015

COLA Reflections

I read recently with mild amusement that Retirees will not be receiving a cost of living adjustment (COLA) to their Social Security income this year.  Apparently the measure that is used did not indicate that an increase was warranted.  The article went on to speculate that perhaps this measure didn’t adequately measure the cost of living for seniors and so forth.  I opened my remarks with noting my mild amusement.   I suspect some may not find a lack of a raise amusing, but I also suspect that many would agree with me that the infamous COLA is seldom all that it is cracked up to be.
My first exposure to the annual Social Security COLA was during my stint working with a non-profit that provided services to the mentally ill.  Most years that I was employed, the residents (our clients) would receive a notice that their benefits were being increased in line with the cost of living.  At around the same time that this income increase was announced, the not for profit would soon meet with the clients to review their “agreement” where the COLA would be cheerfully explained along with a notification of their rate increase for services.   My recollection is that both would be modest with results such as the COLA increasing the Social Security income by perhaps $21 per month and the service fee increasing $17 for a whopping net gain of about $4 or so.  Considering that about half of the mentally ill that I worked with were smokers, $4 wasn’t going to get them or anyone very far – they may have been mentally ill, but they weren’t crazy enough to think otherwise.

Shortly after reading about the lack of COLA for the retirees, I happened upon another article in the media expressing how the increased costs of Medicare would be borne by taxpayers because apparently increases to Medicare are tied to Social Security income and since there was no increase in Social Security, the rates for Medicare could not be increased.  Now I don’t know about how much impact this has one way or the other on taxpayers as it seems to me that taxpayers are supporting Social Security and Medicare.  Passing money from Social Security recipients back to Medicare seems analogous to passing money from your right pocket to your left – in the end it’s still the same amount of money.  As with the mentally ill and their program fees, if retirees would have to give more to Medicare because they get more from Social Security, it would seem to negate the impact of a COLA – simply stated, they would not appear to be much better off whether they got a COLA and then had to give much of it up to pay for Medicare or as they will be this year with no COLA and no increase cost to pay toward their Medicare.

The COLA jolt does not just impact retirees or the disabled; COLA results in an unpleasant reality for many employees as well.   When a cost of living is announced in the workplace, it is usually announced as an across the board increase.  This is good news for the well compensated (and thankfully after many years I’m beginning to be in this group).  In glancing at the joyous (said facetiously) announced choices and rates for health insurance for open enrollment, I notice that my family coverage (and many others) is up about $500 this year.  Let’s say that you are a wage earner making $40,000 per year.  If you receive a 1% COLA, you’ll make $400 more, but to keep the same insurance as you had last year, it will cost you $500.  Further, as we all know, while health insurance has become a formidable budgetary consideration, it does not account for all your needs of living.  I will note that my $500 increase for health insurance doesn’t include the increases that I see on the horizon for vision and dental coverage, nor does it include the predictable 2% or so increase in my school and property tax (and renters if you believe you aren’t impacted by property tax rates, there is a bridge in Brooklyn with your name on it).

One of the most curious ironies of COLA is that it is prescribed as a remedy to inflation but COLAs tend to perpetuate the very problem they are designed to cure.  If workers in the private sector receive a COLA, then their goods and services are driven higher to cover the COLA costs and of course when it takes more money to buy the same goods and services you have inflation.  A similar principle applies to the government sector – increased COLAs require more revenue and more revenue translates to more taxes, borrowing or printing more money (de-valuing the currency) which in turn drives inflation.  This vicious circle of sorts may simplistically be observed as one big ugly bidding war.

So here are my COLA takeaways:
  • COLA isn’t all that it is cracked up to be.
  • COLA might be part of the problem.
  • While both of the above is true, I have never heard of anyone turning down a COLA.

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