The recession is projected to wipe out annual cost-of-living increases for 50 million Social Security beneficiaries for the next three years, something that hasn't happened since automatic adjustments were adopted in 1975.
The Congressional Budget Office says in its latest budget estimates that inflation will dip so low that Social Security recipients will not qualify for annual increases in 2010, or for two years after that. In 2013 through 2019 - when projections are less reliable - CBO estimates annual increases of 2 percent each year, which would be among the lowest.
David Certner, director of legislative policy for the AARP, said many recipients rely on those increases to help pay for rising health care costs, which tend to outpace inflation. Many older Americans have also seen the values of their homes and savings decrease because of the nation's financial crisis.
"They are going to feel like they are falling behind," Certner said.
If the projections hold true, Social Security recipients would forgo a total of $378 billion in increased payments through 2019, according to the CBO estimates.
The Social Security Administration will set next year's cost-of-living adjustment in October, based on inflation over the previous year, as measured by the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W), spokesman Mark Lassiter said.
The Congressional Budget Office projects that consumer prices will drop this year by 0.7 percent, a slightly bigger drop than projected by the Obama administration, but smaller than some private projections.
Since 1975, when automatic increases were adopted, the smallest cost-of-living increase for Social Security was 1.3 percent, in 1986 and 1998. In 2008, the increase was 5.8 percent, according to the Social Security Administration.
The estimates were included in the CBO's 2010 budget projections issued last week. In the report, CBO projects that the Social Security trust funds will collect just $3 billion more in cash receipts than they will pay out in benefits in the 2010 budget year that starts in October. A year ago, before the economy slipped into recession, the CBO projected an $86 billion cash surplus for the same year.
The development will have little practical effect on the program's short-term operation, thanks in part to an additional $116 billion in interest income, as well as a $2.4 trillion balance in the Social Security trust funds. Most of that balance is on loan to the government to pay for other federal programs.
The smaller cash surplus would reduce the government's ability to borrow more from the trust funds, by about $83 billion. But that represents only a small portion of the more than $1 trillion the government is expected to borrow next year.
The shrinking Social Security surplus does highlight future problems for a retirement system that has to accommodate the post-World War II baby boomers reaching retirement age.
The Social Security Administration projected last year that that the trust funds will begin paying out more than they collect in payroll taxes in 2017.
By 2041, the balance will be exhausted unless major changes are made, such as levying more payroll taxes on high earners, changing the formula for annual cost-of-living benefit increases or raising the retirement age.
The administration is scheduled to issue new long-term projections in about a month.
Christian Weller, an associate professor of public policy at the University of Massachusetts in Boston, said the Congressional Budget Office figures highlight the program's dependence on a strong employment market.
"If you lose millions of jobs, you have millions fewer taxpayers. That will put a damper on the tax receipts that Social Security gets," Weller said.
He said it is unclear whether the recession will have much impact on the long-term solvency of Social Security. That depends on how quickly the economy recovers and the long-term growth rate, he said.