Social Security: No 2011 increase expected

By Jeanne Sahadi, senior writer


NEW YORK (CNNMoney.com) -- Chances are high that for the second year in a row Social Security beneficiaries will see no increase in their benefit checks.

The official word isn't expected until Friday when the Social Security Administration announces whether there will be a cost-of-living adjustment for 2011. But those who've crunched the numbers say there just hasn't been enough inflation to justify a bump in benefits.

The last time there was an inflation adjustment was in 2009: Social Security beneficiaries got a higher-than-normal 5.8% increase because of a temporary spike in energy prices in the third quarter of 2008.

Soon after, however, energy prices plummeted. Then the bottom fell out of the economy and by the third quarter of 2009 overall price levels had fallen 2.1% from the same period a year earlier. That meant no increase in 2010 Social Security benefit checks.

This year, there has been some inflation, but prices still are lower than they were in the third quarter of 2008 -- and that's the quarter that counts. By law, the Social Security Administration is required to track inflation using the most recent third quarter that led to an adjustment. So the 2011 decision will be based on the change in inflation between the third quarter of 2008 and the third quarter of 2010. (See 'What deflation -- prices are rising!')

"[There has been] an increase [in prices] relative to 2009, but it's still below the 2008 level, so no COLA again," said Donald Marron, a former director of the Congressional Budget Office.

The CBO in August said it expects beneficiaries will not receive a COLA in 2011, and will receive only a 0.4% increase for 2012.

If the CBO is right, that would mean a monthly Social Security retirement check of $1,170 -- the average among current retirees as of June -- would be the same next year, and rise by about 5 bucks in 2012. (See 'Why I took Social Security early')

More recently, the finance and economics blog Calculated Risk looked at the COLA formula and came to the same conclusion for 2011. But it also noted that even though retirees may go two years without an increase, "those receiving benefits are still ahead because of the huge increase [they got in 2009]."

There's a bit of bright news for high-income earners still working for the Man: If there is no COLA for 2011, that also means there would be no increase in the amount of earnings subject to the Social Security tax, which is currently assessed on the first $106,800 of a person's wages.

Even if the inflation math is correct, the idea of another year without a pay hike isn't likely to be popular with the nearly 58 million people who receive Social Security retirement, disability or supplemental income benefits, particularly those who may face higher Medicare premiums.

Last year, it wasn't popular news either. There was a failed push to offer $250 payments to Social Security recipients to compensate for the lack of a COLA and to serve as economic stimulus. Such a move would have cost roughly $14 billion.

But critics of the extra payments pointed out that Social Security benefits are intended to maintain purchasing power -- which by the inflation measures used they have. And, they noted, benefits don't decline when prices decline, which happened in 2009.

- CNNMoney.com senior writer Chris Isidore contributed to this report To top of page

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