Deflation Reaches Social Security Administration; No Cost of Living Increases in 2010

Since overall prices declined throughout 2009, the social security administration announced that there will be no cost of living increases for recipients next year:

The Social Security Administration makes it official Thursday: There will be no cost of living increase for Social Security recipients next year, the first year without one since automatic adjustments were adopted in 1975.

The announcement comes as President Barack Obama and key members of Congress call for a second round of $250 payments to more than 50 million seniors, veterans, retired railroad workers and people with disabilities.

The payments would be equal to about a 2 percent increase for the average Social Security recipient. The cost: $13 billion.

Obama called on Congress Wednesday to approve the payments, and several key members of Congress said they would.

“This additional assistance will be especially important in the coming months, as countless seniors and others have seen their retirement accounts and home values decline as a result of this economic crisis,” Obama said in a statement.

Blame falling consumer prices for no automatic increase next year. By law, Social Security’s cost-of-living adjustment, or COLA, is pegged to inflation, which was negative this year, due largely to falling energy costs.

This announcement marks a seismic shift in attitudes. “Inflation adjusted” has become “deflation adjusted”. Market participants have noticed this a while ago, but until today it had not yet reached such high government offices as the SSA.

Don’t get me wrong. Of course payments won’t drop outright for the time being. But how many people had expected these upward adjustments to keep going on as they always have? I think quite a lot. What are the implications on the net present value of all unfunded public liabilities? These liabilities are of enormous importance when it comes to getting an accurate picture of the amount of money owed in the US economy. Just one little change such as dropping COLA for even just one year can have vast implications on household attitudes and behavior.

As I noted in August when I explained how much debt there really is in the US:

Then there are unfunded social security and medicare obligations of about $43 trillion according to the Treasury’s own Financial Report for 2008:

The SOSI provides additional perspective on the Government’s long term estimated exposures and costs. However, it should be noted that the Government’s financial statements do not reflect future costs implied by any current policy, such as national defense, the global war on terrorism, and disaster relief and recovery. Table 3 shows the Government’s estimated present value of future social insurance expenditures, net of dedicated future revenues for the programs reported in the Statement of Social Insurance (SOSI), projected to be $43 trillion as of January 1, 2008 for the ‘Open Group’6. While these expenditures are currently not considered Government liabilities, they do have the potential to become liabilities in the future, based on the continuation of the social insurance programs’ provisions contained in current law.

Most importantly, back then I already asserted:

On top of that, I don’t think that people are oblivious to the fact that there is absolutely no way that all social security and medicare benefits will ever be paid. Thus it would only be reasonable to conservatively assume that the present value of those liabilities has dropped (…)

I think it is now clear, even without people yet questioning the ability of the SSA to make the minimum payments: The net present value of unfunded public liabilities has begun to fall, adding in a major way to the current record contraction in credit and loans.


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