Each year, the Social Security Administration computes a Cost of Living Adjustment (COLA) for the payments it makes to beneficiaries which attempts to ensure that spending power of beneficiaries is preserved. The annual COLA has been mandated by federal law since 1975. Prior to 1975, social security payments were adjusted by legislation.

The first automatic COLA, for June 1975, was based on the increase in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) from the second quarter of 1974 to the first quarter of 1975. The 1976-83 COLAs were based on increases in the CPI-W from the first quarter of the prior year to the corresponding quarter of the current year in which the COLA became effective. After 1983, COLAs have been based on increases in the CPI-W from the third quarter of the prior year to the corresponding quarter of the current year in which the COLA became effective.

The COLA for 2008 is set at 5.8%, the largest increase since 1982, primarily due to significant inflation in fuel and food prices during 2008. You can see the computation of the COLA for 2008 at the Social Security Administraton.

Interestingly enough, the current legislation enacted in 1983 does provide for suspension of Cost of Living Adjustments, if the combined assets of the Social Security trust funds are below 20 percent of annual expenditures. (This limitation only applies to Social Security; SSI would be unaffected.) Such limitation has not occurred in the past, nor does it affect the current COLA determination. The combined trust fund assets at the beginning of 2008 are estimated to be 359.0 percent of 2008 expenditures.

The term tipping point can be applied to a process in which, beyond a certain point, the rate at which the process continues will increase dramatically. The budget of the United States has reached its tipping point. A recent event could have, in fact, marked the point in time. The first Baby Boomer—born January 1, 1946—has applied for early retirement at age 62 and received her first Social Security check. On the chart, an upturn in the Medicare growth rate can be detected in 2011 when the first Baby Boomers turn 65. Thereafter, the number of retirees continues to increase while the number of workers per retiree continues to decrease. The pyramid scheme has collapsed.

This is the first, and only, chart in this presentation that is expressed in terms of constant dollars, with a base year of 2008 having been selected. This chart attempts to quantify the size of the commitment that lies ahead with Social Security and Medicare (leaving Medicaid aside for the moment). Using constant dollars removes the inflation factor from the projections thereby bringing some perspective to the numbers. Without this adjustment, the numbers would be far too large to make any sense. The total of the projected deficits—$83 trillion—through the year 2085 averages roughly $1 trillion per year in constant 2008 dollars. Contrast this with the fact that the surplus for the combined programs in 2008 was approximately $69 billion. If the message is not yet clear, it is this…The Spending Trend is not Sustainable.

*Note: Projections based on the intermediate assumptions of the 2008 Trustees’ Reports. The CPI is used to adjust from current to constant dollars.

This chart simply selects the data for the year 2032 from the Entitlements as a Percentage of GDP chart and compares the estimated growth in the entitlement programs against the estimated growth of the economy at that point in time. These projections assume that no new programs are added to the existing forms of coverage. Even absent any additional coverage, it is evident that more has been promised than can be delivered under the existing levels of taxation.

The number of retired workers is projected to grow rapidly starting in 2008, when the members of the post–World War II baby boom begin to reach early retirement age, and will double in less than 30 years. People are also living longer, and the birth rate is low. As a result, the ratio of workers paying Social Security taxes to people collecting benefits will fall from 3.3 to 1 in 2006 to 2.1 to 1 by 2032. The Trustees Report projects that in 2017, when the ratio will be 2.7 to 1, there will not be enough workers to pay scheduled benefits at current tax rates. The Trustees Report also projects that redemption of trust fund assets will be sufficient to allow for full payment of scheduled benefits until 2041.

The preceding paragraph, taken almost in its entirety from Fast Facts and Figures About Social Security, 2007, does a good job of explaining one of the dilemmas of Social Security, which is that the declining demographics of the U.S. population will not support the oncoming retirement wave. Once again, however, the reader is left with the impression that the real problem is more than thirty years away when the report says that “trust fund assets will be sufficient to allow for scheduled benefits until 2041.” This statement assumes that in the year 2017 the general fund of the United States government will begin redeeming the notes (the so-called trust fund assets) held by the Social Security Trust Fund. What is never mentioned, however, is that if there is no change in fiscal policy, the government will have no choice but to borrow the money in the open market to redeem the trust fund notes.

The fact that the population of the United States is aging is no secret. The magnitude of the increase may be surprising, however. The number of individuals over the age of 65 will double in 32 years—from 38 million to 77 million—an additional 39 million people over the age of 65. The total population of California today is 36.5 million. This demographic trend spells trouble for entitlement programs because the ratio of workers to dependents is declining.

The Government Accountability Office prepared the data for this chart using information from the Office of the Chief Actuary of the Social Security Administration, the Office of the Actuary of Medicare and Medicaid Services, and the Congressional Budget Office. The conclusion needs little explanation: Government spending for the big three entitlement programs, as a percentage of GDP, will triple in 70 years, primarily as a result of projected increases in healthcare costs.

This chart shows the total number of social security beneficiaries (purple portion at the base of each column) of all types compared to the total United States population. The number of beneficiaries nearly doubled between 1970 and 2005, increasing from 25,700,924 to 48,434,436. During the same time period, the United States population grew from 205,052,000 to 296,940,126, an increase of only 44.8%. The number of Social Security beneficiaries is growing twice as fast as the general population. This demographic trend has been predicted for many years.

This chart shows the change in Social Security beneficiaries over time by category. Note that Surviving Family Members and Disabled Workers and Dependents is relatively constant. Most of the growth in the number of Social Security beneficiaries is due to the increasing number of Retired Workers and Dependents. This trend is expected to accelerate in 2008 and beyond as the first baby-boomers begin to retire.

At December 31, 2006, approximately 49 million individuals in the United States — almost one out of every six — were receiving Social Security benefits of some form. Sixty-three percent of those beneficiaries were retired workers and 14% were disabled workers. The remaining 23% were survivors or the spouses and children of retired, disabled or deceased workers.