By Nin-Hai Tseng
February 3, 2011

Those pension recipients we eye with scorn as our state and local budgets are crushed under the burden of their generous benefits? They’re being crippled too. Sort of.

If you’re retired, you’re probably paying closer attention to the consumer price index than most of us — when prices rise, pension payouts typically rise along with them. When you’re living on a fixed income, it’s the only real way to get a bump in pay.

But for the second year in a row, more than 58 million Social Security beneficiaries won’t receive cost of living allowances (COLA) in 2011 because of a lack of inflation. By law, the cost of living adjustment is based on the rate of inflation between the last adjustment and the most recent third quarter. The last increase was at the end of 2008 and when the administration announced there would be no COLA for 2011, the consumer price index had fallen by 0.6% between the third quarters of 2008 and 2010.

The inflation problem, or lack thereof, isn’t just hitting federal retirement and disability payments. Many who receive state and local benefits won’t receive a cost of living increase for 2011 either. Keith Brainard, research director for the National Association of State Retirement Administrators, says most of the retirement systems that have discretionary power over COLAs (i.e. those that don’t automatically adjust with the rise and fall of inflation) are choosing not to increase payments, given tight public budgets and the lack of inflationary pressures.

And some retirees, like those in Maryland’s Montgomery County Public School pension, recently found out that not only will they not receive COLAs this year, they actually are still in debt to the plan for last year’s drop in inflation, which didn’t trigger a decrease in payments. Pension recipients recently received a letter with the unwelcome news:

Retirees “must first offset the negative COLA against this year’s positive COLA. [This year’s positive change of ] 1.41 percent is not sufficient to offset the negative COLA of 1.68 percent [last year]. Consequently, there will be no COLA to your pension payment that will be effective January 1, 2011. The negative 0.27 percent that remains will be offset against any future positive adjustments anticipated for 2012.”

That’s right, retired teachers. You still owe us.

It seems as though the move was intended to be fair play, but it likely ends up at least making pensioners feel a little poorer. In Montgomery County, the drop in inflation in 2009 would have automatically cut pension payments for 2010 under local rules but officials approved a special resolution to leave payments unchanged. A rise in the index this year would have cleared the way for a COLA, but inflationary levels didn’t rise enough to offset last year’s drop in the index.

This might sound reasonable enough, especially considering many states and municipalities are struggling to stay solvent under the crushing burden of generous pension plans for public employees. But it comes at a time when seniors are especially vulnerable. Social security is the largest source of income for seniors 65 and older, comprising 40% of the average retiree’s income, according to the Employee Benefit Research Institute. And while there’s a lack of inflation, it’s hard to convince many relying on their savings or home equity as supplements to their retirement that their benefits won’t change much.

Interest rates have been at record lows for a while, hitting certificates of deposit or other low-risk investments. Many receiving social security benefits haven’t had an increase since January 2009 and probably won’t get one until at least 2012. It’s true many beneficiaries saw one of the largest increases then – 5.8% — when energy prices rose sharply the previous year.

At a time when the economy is full of imbalances, it’s better to blame the system than the retirees relying on it.

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