DIBACCO: Tinkering, but no reform

Obama’s COLAs would hit low-wage earners hardest

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According to the latest Rasmussen poll released on Sunday, only 33 percent of respondents favor President Obama’s plans for Social Security contained in his recent budget proposal. The heart of Mr. Obama’s Social Security outlook is not reform but tinkering with the Cost of Living Adjustment (COLA) that, beginning in 2015, would use a different yardstick of inflation. The change would lower payment sums, thereby hitting low wage-earners hard.

What the president and his advisers may not recognize is that COLAs in the nation have finally reached a sensible barometer after nearly a century of experimentation in the private and public sectors. There weren’t COLAs in 1900, and the reason was simple: The periods and degree of inflation were about equal to those of deflation, which meant that the level of consumer prices in 1900 was about the same as a century earlier.

The nation’s participation in World War I sparked inflation and what were called “wage reopeners,” or the opportunity for private firms and government to reopen the matter of wage rates. In 1919, the U.S. Bureau of Labor Statistics aided in the movement by publishing its first Cost of Living Index.

The resultant wage adjustments were selective and rarely geared to achieve complete equity with price changes. Federal arbitration boards awarded COLAs to railroad workers in the 1920s but generally shunned civil servants. COLAs could also reflect decreases, as during the Great Depression, when President Franklin D. Roosevelt cut federal salaries by 15 percent.

COLAs became more widespread and automatic between 1945 and 1983, when prices rose 460 percent The catalyst was a 1948 pact between General Motors and the United Auto Workers, in which a trade-off for an automatic COLA was a longer-term contract.

A double dilemma arose as COLAs were applied to federal salaries and pensions in the 1950s and, finally, Social Security checks in 1972. First, pure inflation, in which all prices rise at the same rate, is unlikely. That meant that COLAs would get out of hand if adjustments were based on price indexes that were too pure or liberal.

Such was the case in the 1970s, when a politically minded Congress legislated COLAs in excess of the actual inflation rate that the elderly had encountered. For example, interest-rate increases for home mortgages were included, even though senior citizens didn’t often buy houses. In 1980, COLAs for Social Security recipients went up by 14.3 percent, a year later by 11.2 percent.

Second, handsome COLAs for federal employees and the elderly not only exerted pressure on the federal budget and Social Security Trust funds, but also fueled higher expectations, giving rise to a new word: entitlement.

Finally, by December 1982, the Bureau of Labor Statistics got it right, developing a specific consumer price index (CPI) for seniors based on what they’re likely to buy. The result: From December 1982 to December 2011, annual COLAs for seniors averaged 2.9 percent — not extravagant but better than the likely effect of Mr. Obama’s chained and complicated CPI proposal.

To be sure, Social Security needs major fixing, but not right away. It has funds to pay recipients for another two decades, and afterward, it will have about 75 percent of what it needs for payments. For the immediate future, policymakers should resolve to get more Americans working so as to pay into the system. They should also increase efforts to eliminate identity theft and disability fraud, which increase anxiety among honest workers over whether their benefits will be available at retirement time. Finally, they should keep federal officials on a path of ensuring that their policies are geared to fiscal prudence, economic growth and price stability.

Thomas V. DiBacco is professor emeritus at American University and author of “Made in the U.S.A.: The History of American Business” (2003).

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