Social Security recipients expected to get smaller cost-of-living adjustment

WASHINGTON -- Come January, the nation's nearly 50 million Social Security recipients will see the smallest cost-of-living increases in their monthly checks in four years, even though they are paying significantly more for such items as food, energy and medical care.

Many private economists are looking for an increase of around 2 percent when the government announces the number Wednesday following release of the Consumer Price Index for September.

The increase compares with a jump last January of 3.3 percent and an increase in 2006 of 4.1 percent. The 2006 cost-of-living adjustment had been the largest in 15 years.

The increase will go to more than 54 million people. Nearly 50 million receive monthly Social Security benefits and the rest Supplemental Security Income payments aimed at helping the poor.

The adjustment each year is based on the change in consumer prices from the July-September quarter of this year compared with the same period in the previous year. Benefit payments have been tied to inflation since 1975.

The big jump for 2006 occurred because energy prices had soared in September of 2005, reflecting the impact of Hurricane Katrina. This year, however, energy prices have been coming down in recent months after spiking in the spring.

With oil prices surging this week to highs above $88 per barrel, analysts believe consumers will get socked with higher gasoline prices in the months ahead, but those gains will come too late to influence the new cost-of-living adjustment. The Energy Department already is predicting that most Americans will pay a lot more to heat their homes this winter.

Also, the cost of food products has been rising much more sharply this year than last, reflecting increased use of corn in ethanol fuel; and as usual, medical costs, which fall heavily on the elderly, have been outpacing gains in other CPI categories.

But energy, food and medical prices have been offset by a moderation in prices in categories that the elderly buy less of such as computers, consumer electronics and clothing.

"Social Security recipients are going to feel like they are getting squeezed," said Mark Zandi, chief economist at Moody's Economy.com. "For most households out buying gasoline and a loaf of bread, it feels like inflation is high."

Part of the Social Security increase will be eaten up by a rise in the cost of Medicare, the giant health care program that covers the elderly and disabled. The government announced earlier this month that Medicare premiums will rise 3.1 percent next year, or $2.50, to $96.40 per month.

While that is the lowest Medicare increase in six years, the good news is likely to be temporary because Congress is expected to reject current plans to make doctors take a 10 percent cut in their reimbursement rates. If doctors escape that reduction, it will mean Medicare premiums will have to rise more quickly in future years to reflect the program's higher costs.

The Social Security Administration on Monday had a ceremony to highlight the opening wave of baby boomer retirements, a generation of 78 million people born from 1946 to 1964. The first of those boomers will turn 62 next year, making them eligible for Social Security benefits.

An estimated 10,000 people a day will become eligible for Social Security benefits over the next two decades, putting a severe strain on the pension program.

If no changes are made, the Social Security trust fund is projected to deplete its reserves in 2041. Even sooner, in 2017, Social Security is scheduled to start paying out more in benefits than it collects each year in payroll taxes. Medicare is facing even greater funding problems because of the rapidly rising cost of health care.

President Bush pledged to make overhauling Social Security the top priority of his second term, but his plan to provide private accounts for younger workers went nowhere in Congress, and Republicans and Democrats remain deadlocked on the issue.

A coalition named Divided We Fail has been pressing to make entitlement reform a major issue in the presidential campaign, hoping to force candidates in both parties to address the need for changes in entitlement programs.

"We want to get all of the candidates on the record and we want to let voters make up their own minds," said Jim Dau, an official with AARP, an advocacy group for people 50 and older.