The Social Security Administration announced today that no Cost of Living Adjustment (COLA) to retirement benefits will be paid in January 2010. This is the first time that no annual COLA has been paid since automatic inflation adjustments were introduced in the 1970s. It is widely expected that no COLA will be paid in 2011 as well, with COLAs resuming in 2012. As a result of this announcement, President Obama has called on Congress to provide $250 payments to 57 million seniors, veterans, and disabled people to off-set the lack of a COLA.

AEI scholar Andrew Biggs, a former principal deputy commissioner of the Social Security Administration, explains that "No COLAs will be paid over the next several years because in January 2009 Social Security paid a 5.8 percent COLA that inadvertently increased benefits by more than the rate of inflation. (Social Security COLAs are calculated every October by comparing the third-quarter data of the Consumer Price Index for Urban Workers (CPI-W) with the previous year's numbers. An increase in the CPI results in a COLA the following January for retirees and other Social Security beneficiaries.) Rising energy prices caused a 5.8% COLA to be ordered in the fall of 2008. However, plummeting prices between the fall of 2008 and the beginning of COLA payments in January 2009 caused the CPI as a whole to drop by around 5%. In effect, the 2009 Social Security COLA compensated retirees for inflation that no longer existed. The overly large January 2009 COLA increased Social Security benefits purchasing power by around 5% above 2008 levels. For a typical retiree this is equivalent to an annual benefit increase of almost $700."

The Social Security Act requires that no COLAs be paid until the Consumer Price Index exceeds the levels reached in October 2008. Given the decline in prices since fall 2008, retirees now have higher purchasing power and will continue to do so until prices again reach 2008 levels. At that point COLAs will resume, most likely in 2012.

In response to the emergency $250 payments, Biggs believes, "There is no substantive policy case for making a $250 ad hoc COLA payment this year. Seniors' benefits have not been reduced and, in inflation-adjusted terms, have actually risen. But a one-time $250 payment is the least-bad alternative in this case, as it is reasonably well targeted toward low-income retirees and does not produce a permanent increase in Social Security benefits."

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Andrew Biggs is a resident scholar at the American Enterprise Institute, where his work focuses on Social Security and retirement policy. He previously was the principal deputy commissioner of the Social Security Administration, as well as being SSA's deputy commissioner for policy. He is available for interview and can be contacted at andrew.biggs@aei.org (202.862.5841) or through is assistant at adam.paul@aei.org (202.862.5852). For additional media inquiries, please contact Sara Huneke at sara.huneke@aei.org (202.862.4870).