COLA: Does it keep inflation bubbling?

It sounds like a soft drink, but it lies at the heart of the problem of cutting government spending. COLA, or cost-of-living adjustment (also called indexing), spreads its tentacles across the huge US economy in a variety of ways.

To 35 million social security recipients, COLA is a treasured safety net which guarantees that their monthly checks will be inflation proof.

Every July 1, social security checks are boosted by the full amount that the consumer price index (CPI) rose over the past 12 months. For some beneficiaries , including military and federal government retirees, indexing takes place twice a year.

To millions of private-sector workers, whose wage contracts include escalator clauses, COLA is insulation against inflation, at least in part.

In some ways, however, indexing -- which began in 1962 with military and civil-service pensions -- casts a dark shadow over the economy, as COLA's influence spreads.

Today, according to Rudolph C. Penner of the American Enterprise Institute, nearly 30 percent of all federal budget outlays are linked in some way to price indexes, adding inexorably to government spending.

Congress and the White House may agree, in any given year, to hold social programs at then-current levels. Yet actual dollar outlays for such programs will rise, as inflation pulls them up the index.

It used to be, when recessions came, that wages in the private sector dipped, as workers tried to save their jobs. This helped to reduce inflation.

No longer, experts say. Because so many wage contracts include COLA, wages have continued to march upward through the last two recessions, adding to the underlying rate of inflation.

Union leaders argue, correctly, that their members -- unlike social security recipients -- are only partly protected by COLA, so that real disposable income slips backward in high inflation years.

Most cost-of-living clauses, in other words, do not provide for full indexing to the CPI, but only at some fixed percentage.

Nonetheless, even this partial protection continues to drive wage levels upward, so long as inflation mounts.

Only 40 percent of all major union contracts include cost-of-living clauses, says Edward Wasilewski of the US government's Bureau of Labor Statistics.But these tend to embrace members of the largest and most powerful unions.

Cola is one reason, experts say, why wages for steel and auto workers have soared well above the national average for manufacturing industries as a whole.

Now, with Chrysler struggling to survive, comes the first major break in COLA. Chrysler members of the United Automobile Workers have agreed to give up COLA and take other wage cuts, as part of the effort to save their company.

"This is a first sign of COLA-busting," said an expert. "Others will come, if firms get in real trouble."

Reducing the impact of COLA on government spending, however, is something else. Recipients of federal transfer programs do not vote directly to cut their benefits. On the contrary, they lobby against such cuts.

Everyone agrees that President Reagan's effort to bring federal spending under control, and eventually to reduce government outlays as a percentage of the economy, requires painful cutbacks in the way COLA is figured.

If Mr. Reagan fails to persuade lawmakers, the result could be more inflation -- if Congress passes major tax reductions, without c ompensating budget trims.

You've read  of  free articles. Subscribe to continue.
QR Code to COLA: Does it keep inflation bubbling?
Read this article in
QR Code to Subscription page
Start your subscription today