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The History of Social Security and COLA Increases

Social Security as we know it today was born in January 1940, under President Franklin D.  Roosevelt. According to the Social Security Administration web site, the first recipient was Ms. Ida May Fuller of Vermont, a legal secretary. Her first monthly check was for $22.54, and ten years later she was still drawing the same amount each month.

Social Security and COLA Increases.

Clearly, at the dawn of one of this country’s strongest social safety nets no one gave much thought to inflation—to the concept that living expenses generally increase each year and that a fixed monthly draw need not have any payment “escalators” built in. One reason was that low levels of payroll taxes were in place to provide for annual increases. Simply not enough money was being collected to pay more than minimum monthly payments, and these were not contemplated to increase beyond the initial amount.

Legislative changes took place in 1950 that sought to address what was an obvious deficiency. For the first time, benefit increases were put into place, but not systematically; they were not raised every year, automatically. Recipients had their monthly benefits recomputed back to when they were first received. Ms. Fuller’s monthly benefit lurched from $22.54 to $41.30, quite an increase. (She lived to be 100 and the sum of her lifetime benefits totaled $22,888.92.)

It would take a few years later before increases were put in place annually.

Social Security and COLA Increases.

Automatic Cost of Living Allowances (COLAs) were put into place in 1975. They were established to offset the ravages of inflation. Interest rates were high and going higher, and the elderly could not sustain themselves on fixed incomes, unless they were fortunate to have pensions—and even then, inflation was devouring their monthly incomes.

The Social Security COLA for 2019 is 2.8 percent. At first glance, this would seem fair. The annual CPI for 2018 was 1.9 percent. Even though one percent above inflation is not large, there are those who would argue that Social Security’s COLA outstrips the annual cost-per-living index and that that is sufficient. That much is true. But those numbers do not tell the complete story.

Take, as merely one example, costs the elderly pay that younger individuals generally do not. These would include the costs for Medicare. Each year costs under that health program typically exceed inflation. And it’s not just healthcare insurance-related costs. Look at this chart reprinted from Think Advisor:

The costs of all these items are not exclusive to the elderly. But many are. Look at the percentage increases over the period of eighteen years. For overall medical costs, 123 percent; for prescription drugs, 253 percent.

Now look at the Social Security cost of living allowances over the same eighteen-year period:

Year Social Security Increase Percentage
2000 3.5
2001 2.6
2002 1.4
2003 2.1
2004 2.7
2005 4.1
2006 3.3
2007 2.3
2008 5.8
2009 0.0
2010 0.0
2011 3.6
2012 1.7
2013 1.5
2014 1.7
2015 0.0
2016 0.3
2017 2.0
2018 2.8

 

It’s clear that Social Security COLAs haven’t come close to keeping up with annual expenses largely borne by the elderly.

And then there’s taxation of Social Security benefits. Once you arrive at your normal retirement age, Social Security payments are not taxed.

Social Security and COLA Increases.

Before that, however, single tax filers who make from $25,000 to $34,000 will need to pay a tax rate of fifty percent on their Social Security payments. If you make over $34,000 annually then you’ll pay taxes at a rate of 85 percent. If you’re married and file jointly, then you’ll pay a 50 percent income tax rate on income between $32,000 and $44,000. You’ll pay 85 percent if your combined income is more than $44,000.

Social Security advocates contend that these taxes are too steep on payments that have such low COLAs built in annually.

So, what’s the point here?

The point is that financial and wealth planning are needed to address these deficiencies. The greater your assets in retirement plans and pensions, in IRAs, in separate savings accounts, the greater your chances that low cost of living increases and taxes on Social Security will not harm you irreparably.

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