Matt Yglesias writes “in semi-defense of Obama’s Social Security pandering,” specifically, the president’s proposal to give each retiree—cruelly deprived an annual Cost of Living Adjustment (COLA) by the apparently less-cruel lack of inflation—a lump sum payment of $250. Yglesias, while acknowledging that Obama’s plan “reeks of opportunism,” nevertheless says:
If congress is determined to do a COLA anyway, it’s much more fiscally responsible to do it as a one-off payment than to make a permanent upward adjustment. If you accept that political reality wasn’t going to allow the no-COLA scenario to happen, having the administration get out in front of a one-time payment may help preempt congressional pressure for a worse idea.
I can hardly fault him for this view, as I’ve said myself that the lump sum payment is the “least bad” option other than doing nothing, and it appears that nothing isn’t on the menu.
But here’s something to think about: even current law is a “second best” solution. If the point of Social Security COLAs is to maintain the purchasing power of benefits, then if inflation is negative the annual COLA should be negative as well. And since today’s price level is below that of one year ago, a reduction in nominal benefits is what would be needed to keep the purchasing power of benefits constant.
But that’s not what the law allows. Bowing the political reality that seniors won’t stand for a smaller number on their check, Social Security does not pay negative COLAs but instead merely pays no COLA until prices rise back to their prior level. As a result, the typical senior’s inflation-adjusted benefits are about $700 higher this year than last year.
In other words, we already have a compromised benefit formula but now we’re making it even more compromised. We’ve decided that not only are negative COLAs politically impossible, and zero COLAs politically impossible, but anything less than $250 per person is politically impossible. If you say so.
But to show how reasonable I am, I wish to propose a fourth-order compromise with sensible government: we can’t possibly expect seniors to be happy receiving only a $250 COLA payment each year. That $250 has to be adjusted upwards each year—in short, a COLA on the COLA. Except that COLA can’t be negative.