Kotlikoff: No, this year's 8.7% COLA is not adequate. And that's primarily because of the long lag time there has been in implementing it, right? The COLA is always a lagging response to price increases—here, calculated between October 2021 through October 2022 and only finally paying out starting this month. That means there was no upward adjustment against strong inflation for fully 15 months. Recipients had to wait that long before getting any COLA. So, back of the envelope math here, with inflation nearing 9% for a year-plus, a reasonable measure is recipients lost nearly 5% of their benefits in real buying power over the period. That's very significant, with many now really behind the eight ball.
GovExec: With respect to the lag-time problem with COLA, can you tell us why you emphasize it?
Kotlikoff: First, it's frustrating that I don't think anyone else has even mentioned this problem or treated it as a serious issue—not in writing, anyway. Most news stories and experts seem to talk about this year's steep 8.7% boost as if it were a "bonus." Not at all. Obviously, at best it would be just barely making up for inflation. And, as I said, it can't because of the tremendous lag-time before it took effect.
GovExec: But can you clarify the impact of the "lag" problem for recipients—maybe an example?
Kotlikoff: Imagine prices went up not 10% but, say, 1,000%. So, if you had to wait 15 months to see any COLA kick in, you would know it when buying a hotdog that costs like $100! OK, inflation is nowhere near that high, but it's been a lot for recent times. It's a very big deal for retirees, the disabled and survivors who rely on Social Security, and Congress needs to understand and address this.
GovExec: As you've noted, the lag in receiving our Social Security COLA—fully a 15-month wait for adjustment in January of each year—lowers everyone's real Social Security income. But for a subset of those, there's the added pain of the WEP/GPO penalty—the Windfall Elimination Provision/Government Pension Offset—which cuts Social Security payments to millions with public-sector pensions. After decades of proposals to lessen or remove these penalties, do you think this Congress might act, with compromise Social Security legislation?
Kotlikoff: There are solid proposals to adjust the WEP and GPO to make them fairer. This could help many recipients. It's something I hope to evaluate in a large-scaled study using my software company's software. And, yes, Congress could always slip a fix into a long bill and change the treatment from one day to the next. But some of the reform plans require Social Security collecting non-covered wage data going back years. These data may not be available. The worst part of the WEP/GPO problem is that so many Americans who worked for long or short periods in non-covered employment did so without realizing the amount of Social Security benefits they would lose from the WEP/GPO. Indeed, many have no idea about this tax on working in non-covered employment until they apply for their Social Security benefits, which can be largely or fully wiped out. The best long-term reform here is to include everyone in the Social Security system. Many state and local governments end up reneging on their promised retirement pensions. Just look at what happened to Detroit city workers whose pensions were dramatically cut when the city went bankrupt some years ago. Plus, many non-covered pensions are not COLA-adjusted. A few years of 7 percent inflation, like we saw in 2022, will wipe those out. More generally, we need to retire the current Social Security system and replace it with a modern version. The current system is a disgrace in terms of its complexity, abuse of participants (including many having their benefits "clawed back" by the government years later because the participant was mistakenly given the wrong amount), and finances.
GovExec: Understood—people who follow you know you consistently argue a maximal position that Congress should enact a total SSA redo. Also, to buttress your argument, you have said already-enacted reforms have worsened a bureaucratic nightmare of confusing exceptions. But still, you say that WEP/GPO is not fair, right now. Tinkering at the edges isn't your preference, but doing so could help millions of people, right? So, could smaller reform happen?
Kotlikoff: True. I do support that. And, yes, it could happen.
GovExec: With the changeover in Congress to Republican leadership, we have hardline members seeking big budget cuts. They may have unprecedented leverage over this Speaker and Congress by threatening to stall raising the debt ceiling. That's power. From your point of view, what kind of legislation might actually make it through, at least the House?
Kotlikoff: I think House Republicans will probably press to un-COLA benefits—or only partially COLA benefits—which they will see as reducing costs. They'll look to do this on the backs of people who will be receiving benefits above a certain, yet-to-be-determined level. We've seen proposals like this already. On the other hand, it's unclear exactly how they can accomplish this. Technically it would be very difficult to do.
GovExec: The Democrats still have control of the Senate and the White House, so the common wisdom is the most strident Republican agenda is unlikely to be enacted. But—again—with the debt ceiling and other key bills held hostage—might the Democrats have to compromise?
Kotlikoff: I know it's been said before, but yes we might see a compromise built around a U.S. retirement age increase, for example. Also, you could see some new and different reduction factors enacted—meaning, legislation making Social Security retirement at some levels more progressive. Maybe they will compromise around a "doughnut hole" situation—where the Republicans make some cuts, but the Democrats go along with it and preserve benefits at the lower end. The pressure is on for both sides to do something. The Democrats, you know, might really seek a deal here at some point soon. They don't want to look like they didn't show up on Social Security issues. We are, after all, just a decade or so from when, you know, somebody's going to have to just say, "Hey guys, we don't have enough money to pay benefits." That's a big, multi-trillion dollar crisis up ahead, if the problem isn't addressed.
GovExec: Can you go deeper on why you think Democrats could make a deal with Republicans whose positions are further from theirs than ever?
Kotlikoff: You know, you highlight that now Republicans are pushing hard toward their aims, toward cuts, and you imply Democrats in the Senate would likely try to block that. But it could even be the opposite, that many Democrats go with some sort of compromise, because there's only so many years before an actual crisis on Social Security—and they want to preserve the system for poor people, and well into the future. Now about the likely benefits cuts the Republicans will want, Democrats are going to be far less inclined. But on a tax increase for Social Security, they would possibly go with that. So, it's possible there could be a compromise on some of these things. Everybody could go after a compromise, in my opinion.
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