March 3, 2021

Your Money: Muddying the Budget Waters With Social Security

But for all of the difficulty lawmakers are having now, their hardest decisions may come this fall when they do battle over which government programs to cut back. And one program that has already been put on the table for discussion is Social Security, even though it has not contributed to the budget deficit.

There is no question the program needs to be tweaked so it can remain solvent for decades to come. And experts say the problem is not that difficult to solve, as long as it is dealt with relatively soon.

The proposed changes would have tinkered with one of the most beloved features of Social Security: the cost of living adjustment, which helps benefits keep pace with inflation so the elderly maintain their purchasing power. The proposed changes would link benefits to a new measure of inflation — one that is projected to rise more slowly than the current index.

“It amounts to a benefit cut,” Alicia H. Munnell, the director of the Center for Retirement Research at Boston College, said.

The proposal, which emerged as a potential bargaining chip earlier in the budget debate, caused Social Security preservationists to cringe. And that is a big reason they argue that any changes should not be fast-tracked as part of the broader deficit debate.

If no changes are made, the program’s reserves are now projected to be exhausted in 2036, a year earlier than last year’s projection. Then the taxes collected would be enough to pay only about 75 percent of benefits through 2085, according to the latest annual report from the agency’s trustees.

The shortfall can largely be attributed to demographic shifts. The coming wave of baby boomers will strain the system, while the number of workers paying into the system is declining. On top of that, people are living longer, and the weak economy is not helping matters.

Changing the cost of living adjustment is just one of several ways to bolster Social Security’s finances. Suggestions have included gradually increasing the retirement age or raising the amount of income subject to Social Security payroll taxes.

The Obama administration’s deficit-reduction commission proposed switching to the new type of index because, members said, it would be more accurate. Unlike the current measure, it takes into account that people tend to change their buying habits when prices rise, substituting cheaper items for more expensive ones. If, for instance, the price of apples goes up, people may instead buy pears, if they are cheaper. The current index assumes that if the price of apples go up, people will just buy fewer apples.

But there is a question of whether the elderly and disabled can make the same substitutions as working people. “If you are down to paying your rent and your food, and the price of your food goes up, you probably just eat less,” Ms. Munnell said.

In addition, the slower rise in benefits would compound over time. That means the older that retirees grew, the bigger the pinch they would feel, especially people who depended heavily on the program. About 43 percent of single people and 22 percent of married couples rely on the benefits for more than 90 percent of their income, the Social Security Administration says. More than half of couples and 73 percent of singles draw more than half their income from the program.

So how much would this cost? Over the last decade or so, the “chained CPI-U” — that is the name of the new proposed index — has risen 0.3 percentage points a year less than the measure used now, according to Stephen Goss, the chief actuary at Social Security. And he expects that would continue in the future.

Consider a worker who retired at 65. After 10 years, the worker would receive 3.7 percent less in benefits than he would receive under the current system; after 20 years, 6.5 percent; and 9.2 percent after 30 years, according to Mr. Goss’s calculations. (He ran the numbers in response to a request by Representative Xavier Becerra, a Democrat from California who is the ranking member of the Ways and Means subcommittee on Social Security).

Let’s assume the retiree had a monthly benefit of $1,261, or $15,132 annually. But as he aged, his benefits would not rise as quickly as they would have under the current system. At 75, he would receive $560 less a year under the new system compared with the current one. At 85, he would receive $984 less, and, at 95, he would receive $1,394 a year less. These changes would resolve about 23 percent of the program’s current shortfall, according to Social Security’s actuaries.

But what is most irksome to some critics is that the proposed index has been called “more accurate.” It may be more accurate for the broader population, they say, but that doesn’t necessarily hold for retirees. (It would, however, save $112 billion over 10 years, according to the Congressional Budget Office).

If accuracy, and not cost savings, is the goal, they suggest further analysis of an experimental “elderly” index that accounts for the fact that older people spend a greater share of their budget on medical care. That index is estimated to increase about 0.2 percentage point more each year than the broader indexes. In fact, Ms. Munnell said that moving to the elderly index — and adding the mechanism to account for substituting cheaper items when prices rise — might make more sense.

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