Social Security and VA COLA Cuts Will Have a Big Effect on Veterans and Their Families: a New Analysis


Some politicians in Washington are proposing to cut the cost-of-living adjustment (COLA) for people who receive Social Security and for Veterans Affairs (VA) benefits – even after two years without those programs providing a COLA. This COLA cut has an obscure name – the chained CPI (consumer price index). It would do real damage by changing the formula used to calculate the annual COLA.

Click here for a pdf of the fact sheet with citations.

The chained CPI would cut significantly the benefits of all current and future Social Security beneficiaries, including retired and disabled veterans, even after politicians promised repeatedly that any changes to Social Security would not affect current beneficiaries. Veterans who receive VA disability compensation benefits or VA pension benefits also would be harmed as the COLA for those benefits is based on Social Security’s COLA.

The Congressional Budget Office estimates that switching to the chained CPI would save $208 billion over ten years by reducing Social Security, disability and other benefits, and by increasing revenues. More than half of this amount – $112 billion – would come from Social Security alone. Up to $24 billion would come from VA benefits and civilian and military retirement pay.

Switching to the chained CPI to calculate the COLA would be very unfortunate because the evidence suggests that it is a less accurate way to adjust for inflation affecting seniors and persons with disabilities. A more accurate CPI would result in a higher COLA because it would reflect the greater share of spending that seniors and people with disabilities devote to health care and to the greater rate at which health care prices increase.

Click here for a pdf of the fact sheet with citations.


Effect of the COLA Cut on Social Security Retirement Benefits

One of our nation’s most important programs, Social Security pays benefits to more than 9 million veterans, which is four out of every ten veterans. Ninety-three percent of veterans receiving Social Security – about 8.5 million people – are aged 62 or older, which means that they receive retirement or survivors benefits (either based on their own work record or that of their spouse). Thirty-five percent of adult Social Security beneficiaries are veterans and their families.

The proposed COLA cuts would have their biggest impact when benefits are needed the most, in very old age or when someone has been receiving disability benefits for many years.
The average retirement benefit for a veteran receiving Social Security was about $15,500 in 2010. Using the chained CPI would significantly reduce those benefits. A veteran with average earnings who retires at age 65 would get a benefit cut of $577 at age 75 and $1,006 at age 85. By age 95, when Social Security benefits are probably needed the most, that person would lose $1,422—a reduction of 9.2 percent. [See Figure 1]

Figure 1

Effect of the COLA Cut on Veterans’ VA Disability Compensation Benefits

Veterans who become disabled due to injuries or illnesses sustained during, or as a result of, military service, are generally eligible for VA disability compensation benefits. There were 3.2 million veterans receiving such benefits in 2010. A 100 percent service-connected disabled veteran is currently entitled to receive $32,076 a year. Under the chained CPI, which is a cut in the formula traditionally used to determine the COLA for VA benefits, a disabled veteran who started receiving VA disability benefits at age 30 would have his or her benefits reduced by $1,376 at age 45, $1,821 at age 55 and $2,260 at age 65. [See Figure 2]

Veterans receiving VA disability compensation benefits, who also receive Social Security disability benefits, would be hurt twice since both of their income sources would be affected by the COLA cut. About 771,000 veterans received Social Security disability benefits in 2010.
 

Figure 2

*Note: VA disability compensation benefits vary based on the severity of the veteran’s service-related disability, injury or illness, and in some cases the size of his or her family. For the purposes of the analysis above, the beneficiary was assumed to be a 100 percent disabled veteran claiming the 2011 annual rate of $32,076 at age 30 for a veteran who is unmarried and has no children.

Effect of the COLA Cut on VA Pension Benefits for Permanently Disabled and Poor Veterans Aged 65 or Older

Veterans with low incomes who are either permanently and totally disabled, or age 65 and older, may be eligible for pension benefits if they served during a period of war. There were more than 313,000 veterans receiving such benefits in 2010. A veteran with no income is currently entitled to receive $11,830 a year in VA pension benefits. Under the chained CPI, which is a cut in the formula traditionally used to determine the COLA for VA benefits, a veteran eligible for a VA pension who started receiving benefits at age 65 and was living in poverty would have their benefits cut by $341 at age 75, $672 at age 85, and $993 at age 95. [See Figure 3]
 

Figure 3

*Note: VA pension benefits are available to permanently and totally disabled veterans of any age, and veterans aged 65 or older, with little or no income. For the purposes of the analysis above, the beneficiary was assumed to have no income and claimed benefits at age 65.

Chained CPI is Not an Accurate Measure of Inflation for Seniors and People with Disabilities

Veterans deserve no less than to have the COLA adjustments of their Social Security and veterans’ benefits based on an accurate measure of the effects of inflation. The current COLA formula does not take into account the higher share of spending devoted to health care by seniors and people with disabilities, and that health care prices rise much more rapidly than overall prices. For instance, in 2009 spending on health care was more than twice as large as a percentage of total spending for people age 65 and over (12.9 percent) than for people ages 25–64 (5.3 percent). Moreover, since 1989 health care prices have risen 50 percent more than overall inflation. Although veterans who have service-connected disabilities and those receiving pension benefits are eligible for VA health care, they may still be impacted by rising out-of-pocket health care costs.

Adopting the chained CPI would make the current inadequate COLA worse. Instead, Social Security and VA benefits should be based on a COLA formula that takes account of these higher health care costs called the CPI-E (Experimental CPI for the Elderly).

The CPI-E rises at a slightly faster rate than the formula (CPI-W) currently used to determine the Social Security and VA COLAs, and at a still faster rate than the proposed chained CPI. Compared with the CPI-E, the chained CPI registers bigger declines in purchasing power over time – about $2,400 a year in Social Security retirement benefits by age 95. [See Figure 4]
 

Figure 4

Social Security does not contribute a penny to the federal deficit, and its benefits should not be cut to reduce the deficit. Most Americans receiving VA benefits live modestly; they cannot afford to have their benefits reduced through a COLA cut. Instead, Social Security and VA benefits should be adjusted by a COLA that more accurately accounts for the higher health care costs of seniors and people with disabilities, one that would do a better job of assuring that benefits, earned through work and sacrifice, maintain their purchasing power no matter how long a veteran lives. The federal budget should not be balanced on the backs of Americans who need help the most or who have made significant sacrifices to defend our nation.

Click here for a pdf of the fact sheet with citations.


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