If investors need another sign of the changed economic landscape, they need look no further than Social Security.
For the first time in more than three decades Social Security recipients will not receive a benefit increase, formally known as a cost of living adjustment (COLA), in 2010, federal forecasts show, The New York Times reports.
COLA is determined by a formula set by federal law, and it roughly parallels the consumer price index, though the two formulas are not identical. Senior citizens can get a ballpark estimate of their likely annual benefit increase from the consumer price index's rise.
Once cost increases reach a certain level, or threshold, the COLA is triggered for Social Security. The fiscal 2009 increase was 5.9 percent, and there's been a Social Security COLA every year since 1975.
No inflation, no COLA
However, both the Obama administration and the Congressional Budget Office (pdf) are forecasting that Social Security beneficiaries will not receive any cost of living adjustments in fiscal 2010 or 2011. The reason? The pronounced recession in the United States, which has created pricing pressure -- not pricing power -- for businesses. Pricing power is so weak for firms that the Federal Reserve believes the nation is more likely to experience a bout of deflation -- not inflation -- at least through mid-2010, and perhaps for a longer period.
Deflation -- a protracted, systematic decline in prices and wages -- occurs in pronounced recessions and in other conditions during which demand is nonexistent, and it robs companies of the ability to increase revenue and hurts the economy's ability to grow. If it takes hold, that's another hurdle policymakers will have to grapple with as they attempt to end the U.S. and global recessions.
The lack of a COLA adjustment would represent a net-gain in revenue for the Social Security operation, although there will be some subtractions to revenue, due to the fact that Medicare Part B premium increases are linked to Social Security's COLA and cannot rise more than the COLA. Hence, if there is no COLA, the Part B premium can not increase.
However, the lack of a benefit would also feed fewer dollars into the U.S. economy at a time when it needs all the demand pressure it can get, due to a smaller workforce stemming from layoffs and belt-tightening across the nation, senior citizens included.
Economic Analysis: The net result of no 2010 COLA is that millions of Social Security recipients will see their monthly benefit check reduced for the first time. Though the amount would be small, it represents another incremental reduction in income -- like a small increase in an electric utility rate or a small property tax increase -- that reduces the amount of money Americans have to spend, save, or invest. When combined, these incremental cuts place a substantial drag on the economy and are one major factor cause of the declines in retail sales and discretionary purchases.
Further, there's virtually no chance that Congress will revisit the COLA formula. The COLA stems from a grand political consensus that took years to negotiate and forge, and that fact, combined with the generation redistribution that already occurs under Social Security (the system redistributes income from younger generations to older generations), all point to lawmakers letting the inflation protection work as designed.