March 29, 2024

Your Money: The Potential Effect of Obama’s Social Security Proposal

The president has proposed slowing the rate at which benefits increase over time, a change that would ultimately hit the oldest of the old, often single women, many of whom have probably exhausted any other savings. Many members of this group also face higher health costs, have little hope of working again and often live without the support of a life partner.

But advocates for retirees say that what is perhaps the most frustrating about all of this is that Social Security, which is self-financed through payroll taxes, does not contribute to the deficit. Yet it is being lassoed into the broader debate.

“With people facing an increasingly insecure retirement, this is no time to say, ‘Let’s cut Social Security,’ ” said Joan Entmacher, vice president for family economic security at the National Women’s Law Center. “It’s even more disturbing to be having a discussion about how much to cut benefits for people who already struggle to make ends meet — while some lawmakers insist that we can’t ask the wealthiest Americans and large corporations to pay a penny more in taxes.”

The Obama administration proposes to water down one of Social Security’s strongest features: the inflation adjustment, which enables retirees to maintain their purchasing power over long periods. Starting in 2015, the program would switch to a measure of inflation that has risen more slowly than the current index — on the order of about 0.3 percentage point less each year.

That does not sound like much. Nor would it lead to a big benefit cut right away. Moreover, President Obama did include a measure to soften the impact of the change, which we will dissect below. But the rate of slower growth would still compound over time and would ultimately cost many older people thousands of dollars over the course of their retirement.

“When you look at the retirement system, people don’t have anything else,” said Alicia H. Munnell, director of the Center for Retirement Research at Boston College. “And to have the only statement about Social Security solvency being a suggestion that what we need to do is reduce the indexing is not a useful conversation.”

It has been widely reported that if no changes are made to Social Security, its reserves will be exhausted in 2033, according to the latest annual report from the Social Security Administration’s trustees. After that, the payroll taxes collected would be enough to pay about 75 percent of benefits through 2086.

The switch to a different measure of inflation — known as the “chained C.P.I.-U” — would resolve about 20 percent of the program’s current shortfall, according to Social Security’s actuaries. (C.P.I.-U stands for the Consumer Price Index for All Urban Consumers.)

But here is how it would initially hit retirees’ pocketbooks: Workers who retired at age 65 would receive 3.7 percent less in benefits after 10 years than they would under the current system; after 20 years, 6.5 percent less; and after three decades, 9.2 percent less, according to calculations by the Social Security Administration.

The administration has said it will only make a deal that includes some protections, and it incorporated two small benefit “bump-ups” — each equivalent to 5 percent of the average retiree’s benefit check, or about $800 annually in today’s dollars — as part of its proposal. The bumps would be phased in over 10 years, beginning at ages 76 and 95.

So take a woman with an initial benefit of $1,100 a month, or $13,200 a year, which is the median benefit of single women 65 and older, according to the National Women’s Law Center. (This benefit represents about 73 percent of this group’s total income, which is about $18,000.)

By the time she is 75, her benefits would be $41 less a month, or nearly $500 a year less, than under the current program.

“That doesn’t sound like so much,” Ms. Entmacher said. “Well, it’s equal to five days’ worth of food. So if you have your monthly Social Security check and you are trying to figure out how to get to the doctor, how to pay your rent and how you pay your out-of-pocket medical expenses, every dollar counts. So are you going to skip a meal for 15 days, each month, to save five days’ worth of food? Or are you going to cut your pills in half?”

Article source: http://www.nytimes.com/2013/04/20/your-money/the-potential-effect-of-obamas-social-security-proposal.html?partner=rss&emc=rss

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