The $38 Billion Shadow Stimulus

How Social Security's cost of living increase became 2009's first stimulus package.

While a new Congress and a new White House debate details of an economic stimulus plan, Social Security recipients are already reaping a $38 billion windfall.

The extra money comes thanks to a quirk in the Social Security Administration's regularly scheduled cost of living adjustment.

Every year, Social Security payments increase along with the Consumer Price Index for Urban Wage Earners and Clerical Workers. The increase is set at whatever the change in inflation was between July and September from one year to the next.

Last year, soaring gas prices sent the Consumer Price Index skyward, and in October the Social Security Administration set the cost of living increase at 5.8% for 2009.

That's the largest adjustment since 1982, amounting to an extra $35.8 billion, says SSA spokeswoman Kia Green. The increase for Supplemental Security Income is an additional $2.5 billion.

Since then, prices have collapsed. In November, the most recent month the figure is available, the index used to calculate Social Security benefits decreased 2.3%. In December, it's likely to have fallen further, increasing the economic impact of the checks for recipients and potentially helping to stoke consumer spending.

"If they perceive they're getting a raise in their Social Security benefits, it should have a stimulative effect," says Andrew Biggs, a former deputy commissioner for the Social Security Administration and a resident scholar at the American Enterprise Institute. "Seniors seem to be very pleased that they're getting such a large COLA," Biggs says.

Couples, both receiving benefits, would expect to see their average monthly payment in 2009 increase to $1,876 a month, from $1,773 in 2008. Over the course of the year that works to just over $1,200 which, coincidentally, is the same amount of tax rebate couples received from last year's stimulus checks. Those increased Social Security checks start going out on Jan. 14.

What will happen to prices over the course of 2009 is anyone's guess. If inflation returns as the Federal Reserve increases the money supply, that cost of living increase could quickly be eaten away.

A best-case scenario for Social Security recipients would be if deflation sets in. The cost of living adjustment does not decrease if the cost of living goes down, it only increases when costs go up.