Oct. 15 (Bloomberg) -- President Barack Obama has proposed spending $13 billion to give Social Security recipients $250 apiece since seniors will not receive a cost-of-living increase for the first time since 1975.

The price index used to calculate the adjustment was down 2.1 percent in the third quarter compared with the same time last year, according to Labor Department figures issued today in Washington. By law, the government cannot cut the benefit, so the average monthly payment will remain the same in 2010, the Social Security Administration confirmed today in a statement.

The president yesterday endorsed giving the $250 payment next year through an extension of a program created under the economic stimulus legislation. Congress would have to act for the payment to occur next year and House Ways and Means Committee Chairman Charles Rangel, a New York Democrat, said he supports extending the program into 2010.

The Social Security trustees this year projected there will be no adjustment for inflation until 2012 as the worst recession since the 1930s continues to keep prices in check. The AARP is among advocates for retirees saying procedures may need to change to better reflect the escalating cost of specific items that affect seniors, such as health care.

Retiree Expenses

The consumer-price index “doesn’t accurately reflect what seniors buy day to day,” Christina Martin Firvida, director of economic security for AARP, the biggest advocacy group for older Americans, said in an interview. The group would “absolutely” support a better measure for gauging retiree expenses, she said.

The cost-of-living adjustment, or COLA, is based on the consumer-price index for workers, urban wage earners and clerical workers. While the overall index was down in the third quarter from 2008, reflecting the plunge in oil prices, the measure’s health-care index was up 3.6 percent in the year to September, today’s Labor Department report showed.

Laurence Kotlikoff, an economics professor at Boston University, said that Social Security recipients might not even see an increase in their cost-of-living adjustment when prices begin to rise because the adjustment is based on the lower of either consumer prices or wage growth.

“The wage growth may be less than the CPI,” Kotlikoff told Bloomberg Radio. “You could have years here in the future where prices are going up and people aren’t receiving any increase in their Social Security benefit. That’s going to cut into the real incomes of the elderly.”

Stimulus Plan

The Obama administration’s $787 billion stimulus bill signed into law in February authorized a one-time $250 payment, made earlier this year, to senior citizens, disabled veterans and disabled people living on Social Security benefits.

Senator Bernie Sanders, an independent from Vermont, and Representative Peter DeFazio, an Oregon Democrat, introduced legislation last month to give Social Security recipients another $250 payment next year in lieu of a cost-of-living increase.

Senator Judd Gregg, the top Republican on the budget committee, denounced the idea as an attempt to “buy off” seniors. He said the government has a “fair and reasonable system” for determining benefit hikes and “the reason they’re not going to get a COLA is because the cost of living” is not increasing.

‘Pandering’

“This is pure political pandering,” said Maya MacGuineas, head of the nonpartisan Committee for a Responsible Federal Budget, a Washington-based group that advocates balanced budgets. “Instead of pandering to current retirees, we should be talking about how to bring the Social Security system into balance, so that it is sustainable for current and future generations alike.”

Effective in January of this year, Social Security beneficiaries received a 5.8 percent cost-of-living increase, the biggest since 1982.

The absence of an adjustment, known as the COLA, next year also means the maximum income liable for Social Security taxes will remain at $106,800 in 2010.

The annual cost of Social Security benefits represented 4.4 percent of gross domestic product in 2008 and is projected to increase to 6.2 percent of GDP in 2034, according to the trustees report issued earlier this year. The costs will climb as the number of retirees eligible for benefits almost doubles to 79.5 million in 2045 from 40.5 million this year.

Going Broke

The Social Security trust fund will run out of assets in 2037, four years sooner than previously forecast, the trustees said in May. Spending on Social Security is expected to exceed revenue in 2016, one year earlier than last year’s forecast, according to the report. The trust fund will need an additional $5.3 trillion over the next 75 years to meet all scheduled benefits, the trustees said.

The lack of an inflation adjustment next year also means the roughly 75 percent of the 41 million recipients automatically having their Medicare Part B premiums for physician services deducted from their Social Security checks will not see an increase in cost next year.

A so-called hold-harmless provision in the law prevents an increase in Medicare premiums from cutting benefits. If benefits don’t go up, neither will the premium, which is currently $96.40 a month.

CBO Outlook

That means that the remaining 25 percent of Social Security recipients, including those new to the program, higher-income beneficiaries and those eligible for Medicaid, may have to make up the difference. The nonpartisan Congressional Budget Office projects premiums for them will rise to $119 in 2010 and to $123 in 2011.

States, which administer the Medicaid program, will pay the higher premium for those eligible, leaving the remaining 3.2 million new or higher-income retirees with bigger out-of- pocket Medicare expenses, according to an AARP calculation.

A bill passed by the House of Representatives to have the government pick up the added cost next year has stalled in the Senate. “Time is of the essence” on this legislation, said AARP’s Martin Firvida, because the premiums need to be set soon for next year.

To contact the reporter on this story: Timothy R. Homan in Washington at thoman1@bloomberg.net

Last Updated: October 15, 2009 14:23 EDT