14 October 2005

It's COLA Time.

Social Security has a pretty remarkable autopilot. Its funding is privileged in the budget process as "non-discretionary" and its payments and tax provisions are adjusted automatically by inflation with its COLA (cost of living adjustment) provisions. On the tax side:

11.3 million workers will pay higher taxes next year because the maximum amount of Social Security earnings subject to the payroll tax will rise from $90,000 currently to $94,200 next year. In all, an estimated 159 million workers will pay Social Security taxes next year.

Many liberals have sought to eliminate or increase this cap, as it creates the quintessentially regressive tax (the rich face a zero percent tax bracket on their marginal earnings) as a way of increasing the solvency of Social Security. The program taken as a whole, however, is not so starkly regressive, because benefits have some relationship to earnings taxed for social security purposes, preventing high income workers from getting huge Social Security checks, and the formulas for computing benefits disproportionately favor low income workers.

On the benefits side, checks will be up 4.1% this year. Many analysts, particularly conservatives, think that this overstates real inflation and want to revise the measure as a way of reducing future Social Security benefits and thereby creating more room in the Social Security part of the budget. Medicare premiums will go up by $10.30 as well, however, eat up about a quarter of the average benefit increase (but premiums won't go up more than the benefit increase for individual beneficiaries, if the COLA is less than $10.30, the net benefit will simply stay the same). SSI payments will also increase (it is a means tested Social Security supplemental payment), and many seniors without employer provided retiree health insurance will be signing up for the new and dreadfully complex prescription drug benefit, for a fee for higher income recipients, by November 15th of this year as well (it takes effect in 2006).

Higher energy prices, however, are expected to eat up all of these COLA increases and more in the coming year.


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