Social Security Administration Announces, No Benefit Increase in 2011

Social Security Administration Announces, No Benefit Increase in 2011

It seems timely that as we have been reviewing the retirement models for American workers, the Social Security Administration announced that there would be no increase in the Social Security benefit amounts for 2011. The announcement came as no great surprise, since benefit amounts are indexed to inflation; most observers correctly anticipated that with low inflation, 2010 benefit amounts would remain in place. The announcement was published in the Federal Register, Vol. 75, No. 206, on Tuesday, October 26, 2010.

The logic of tying annual Social Security benefit increases to inflation appears to be quite rational on the surface. If there is a significant increase in the cost of living as measured by a national measure, such as the Consumer Price Index (CPI) for Urban Wage Earners and Clerical Workers, benefit levels should be offset to account for that increase. The issue is that any measure such as the CPI is a gross statistic averaged across the entire nation and all socioeconomic levels. As such, the CPI fails to account for regional and even local variations in the economic environment. Furthermore, the market basket of goods and services that go to makeup the CPI contains many items, which may not be appropriate for “retired” individuals.

That market basket is composed of 200-item categories; eight of the major groups of items are listed below:

1. Food and Beverages
    (breakfast cereal, milk, coffee, chicken, wine, full service meals, snacks)

2. Housing 
   (rent of primary residence, owners' equivalent rent, fuel oil, bedroom furniture)

3. Apparel 
    (men's shirts and sweaters, women's dresses, jewelry)

4. Transportation
    (new vehicles, airline fares, gasoline, motor vehicle insurance)

5. Medical Care
    (prescription drugs and medical supplies, physicians' services, eyeglasses and eye care, hospital services)

6. Recreation 
   (televisions, toys, pets and pet products, sports equipment, admissions);

7. Education and Communication
    (college tuition, postage, telephone services, computer software and accessories);

8. Other Goods and Services
    (tobacco and smoking products, haircuts and other personal services, funeral expenses).

It does seem strange that items such as “bedroom furniture, new vehicles, college tuition” have found their way into an index used to determine benefit increases for individuals who, for the most part, are over 65 years of age. Conceivable, bed frames and mattresses have to be replaced, automobiles do have to be replaced, and even a 65-year-old accountant may want to earn a teaching degree.

Even the Congressional Budget Office questioned the use of the CPI as an overstatement of the cost of living, pointing out that it, “… may seriously distort private and public economic decisions.”. Interesting enough, this question was raised by the CBO in 1994 and we are still using the CPI to adjust Social Security benefits and a host of other payment systems.