Social Security Taken Over by Scrooge; $250 Payment Nixed
Last week, Republicans and a handful of Democrats nixed a one-time payment of $250 in 2010 to Social Security recipients who haven't received cost of living adjustments (COLA) since 2008. In 2009, Social Security recipients had gotten a $250 payment to help with the lack of a COLA adjustment that year.
The justification for the $250 payment would have been that while overall inflation may be flat, the cost of medical services -- a big-ticket item for seniors -- is running ahead of overall inflation. If you believe in stimulating the economy, the $250 payment would have helped, since there's a good chance that most of the $250 would be spent immediately.
While there are many affluent seniors who could easily survive without the $250, there are also millions of seniors who are struggling to make ends meet, particularly if they have high medical bills. I wish that Congress could have found a way to funnel the $250 to those seniors who truly need the money, and instead found other, larger savings to cut in the federal budget.
This decision to avoid a $250 payout comes on the heels of the repeal of the generous "do-over" provision, which had allowed you, at any time, to pay back the Social Security benefits you had previously received and reset your benefits at a higher level. Since you weren't required to pay interest, this feature amounted to an interest-free loan. It was used primarily by savvy seniors who could afford to save their Social Security benefits, earn interest on those savings, repay the benefits later, and pocket the interest they had earned. The repeal means you can still invoke a "do-over," but only in the first 12 months of receiving benefits.
Frankly, I think the new "do-over" rule is fair. This new rule should be motivation to analyze your situation carefully before starting your benefits. This is particularly appropriate if you're considering starting Social Security benefits early, before your Full Retirement Age (FRA), which is now age 66 for most people approaching retirement.
Before your FRA, the earnings test can reduce your Social Security benefits. For every dollar you earn in wage income over $14,160 per year, your Social Security benefits are reduced by 50 cents. After you reach your FRA, you can earn an unlimited amount of wages without reducing your Social Security benefits. I've previously written about the substantial advantages of delaying Social Security benefits; if you can at least wait until your FRA to start benefits, there's much less need for a do-over.
These small steps our leaders have taken to help balance our federal budget are like bailing with a pail when the ship is sinking! They will need to approve far, far bigger changes in overall federal spending, including Social Security and Medicare, to get the deficit under control. I hope our political leaders aren't deluding themselves by thinking they're managing federal spending by adopting these very minor cost reductions in Social Security benefits.
A good place to start the debate would have been with the Deficit Commission's report; while it wasn't perfect, it proposed real changes while protecting those who are truly needy. Unfortunately, the commission couldn't get enough votes to pass along its report to Congress. To the extremists on both sides of the political spectrum, I say -- what are the realistic compromises that you recommend? Doing nothing but disagreeing and insisting on extreme positions is, really, obstructing progress and accomplishing nothing.
More on MoneyWatch:
- The End of Social Security's Interest-Free Loan
- When Should You Start Social Security Benefits? Do the Math!
- Deficit Commission's Proposals: What They Could Mean for Your Retirement
- 3 Big Myths About Social Security
View all articles by Steve Vernon on CBS MoneyWatch»
Steve Vernon helped large employers design and manage their retirement programs for more than 35 years as a consulting actuary. Now he's a research scholar for the Stanford Center on Longevity, where he helps collect, direct and disseminate research that will improve the financial security of seniors. He's also president of Rest-of-Life Communications, delivers retirement planning workshops
and authored Retirement Game-Changers: Strategies for a Healthy, Financially Secure and Fulfilling Long Life and Money for Life: Turn Your IRA and 401(k) Into a Lifetime Retirement Paycheck.
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