How deficit reduction plans would affect Social Security
Posted on 18 November 2010
By Mark Miller
Permanent URL of this article: http://retirementrevised.com/money/how-deficit-reduction-plans-would-affect-social-security
The growing momentum for federal budget deficit reduction is pointing toward cuts in Social Security benefits for millions of Americans–and one of the proposed changes would begin taking effect quickly.
President Obama’s deficit reduction commission won’t issue a report until December, but several panel members have released detailed trial balloon proposals. The two bipartisan plans released so far each include Social Security benefit cuts; a third, released by Rep. Janice Schakowsky (D-Illinois), wouldn’t cut benefits.
Before getting into the details on how benefits might be affected by all these plans, a couple facts bear repeating.
First, Social Security isn’t a direct cause of the federal budget deficit. The Social Security Trust Fund (SSTF) currently runs a $2.5 trillion surplus, built up through earlier reforms that anticipated the looming retirement of the huge baby boomer generation.
Second, Social Security is not “in the red,” or “going bankrupt,” as pundits and politicians sometimes say. It’s true that Social Security took in less in payroll taxes this year than it paid out. That was due mainly to the deep recession, which has cut into payroll tax collections and pushed more unemployed workers to file for early benefits. But that’s a short-term problem that will reverse itself when the economy improves.
Finally, the SSTF really does exist, contrary to rumors that it exists only as an accounting trick or has been looted by the government. The simple fact is that the SSTF surplus funds don’t sit in some giant government piggy bank gathering dust; instead, the surplus is invested (safely, one assumes) in government-issued Treasury notes. Those notes are obligations of the federal government back to the SSTF, to be cashed in to finance all those looming boomer retirements.
Social Security does have a long-term problem. The program operates on a 75-year time horizon–and it requires adjustment periodically due to rising longevity and the fact that the nation’s birthrate has been falling. Current projections show the SSTF will be exhausted around 2035; at that point, Social Security would be reliant on current payroll tax revenue, and would only be able to pay about 76 cents of promised benefits.
The two sets of bipartisan plans tackle it through a combination of Social Security benefit cuts and new revenue.
One plan, released by the co-chairman of the deficit commission, address that shortfall with a proposal made up of about 25 percent new revenue and 75 percent benefit cuts. New revenue would be generated by gradually lifting the percentage of wages subject to Social Security payroll taxes, currently capped at $106,800; by 2050, 90 percent of wages would be subject to tax.
Past Social Security benefit cuts have nearly always been phased in slowly to avoid impacting current retirees or those close to retirement. Not so with this proposal. One of the most important changes would change the formula for Social Security’s annual cost-of-living adjustment (COLA). The changes would be phased in starting in 2012.
Commission co-chairmen Alan Simpson and Erskine Bowles propose replacing the current measure, the Consumer Price Index for Urban Wage Earners and Clerical Workers–known as the CPI-W–with a new “chained” CPI that takes into account “substitution purchases” consumers often make to avoid high prices. The “chained” CPI is expected to rise 0.3 percent less annually than the CPI-W. That may sound small, but it’s powerful when compounding is factored in, cutting lifetime benefits by about 9 percent for someone reaching the age of 92, according to the National Academy of Social Insurance (NASI).
Critics of this reform argue that the “chained” CPI doesn’t reflect accurately the inflation experienced by seniors, since they spend a higher proportion of their income on health care, where prices are rising at about four times the rate of general inflation.
Another key benefit reduction would be made by making technical changes to the way that Social Security averages workers’ lifetime earnings to determine benefits. This is the biggest single change, reducing the Social Security Trust Fund (SSTF) long-term shortfall by 45 percent.
The last big proposed cut is to push the full benefits retirement age to 68 by 2050, and 69 by 2075. Reform advocates and actuaries argue that we’ll all need to work longer due to rising longevity rates. But it’s important to understand that boosting Social Security’s full retirement age is a lifetime benefit cut for everyone, no matter when you claim benefits.
Consider the increase in retirement age already being implemented under the 1983 reforms. When the full benefit age hits 67 in 2022, anyone claiming between age 62 and 66 will receive about 12 to 14 percent less in lifetime benefits, according to NASI.
The second bi-partisan deficit reduction trial balloon steers clear of the higher retirement age, but does recommend other cuts, including the “chained” CPI to compute COLAS. This proposal, the brainchild of Alice Rivlin, who served as budget director during the Clinton Administration, also suggests several new revenue sources.
Finally, Schakowsky’s proposal keeps current benefits where they are, addressing the SSTF’s long-range solvency issue through new revenue.
It’s not clear yet which, if any, of these proposals will move forward, although the conservative shift in Washington’s political climate following the mid-term elections suggests the odds are rising for Social Security benefit cuts of some kind.
That would be a bad move at a time when the need to bolster retirement security is rising dramatically. Americans simply are on track to run out of money in retirement–the result of depressed retirement accounts, unemployment and rising expenses for healthcare.
Earlier this year, the Employee Benefit Research Institute (EBRI) reported that many American households–in all income brackets--won’t have enough cash in retirement to meet expenses in retirement. EBRI’s 2010 Retirement Readiness Rating study projected that almost one-third of Americans in the second-highest income bracket will run out money after 10 to 20 years in retirement. And, nearly two-thirds (64 percent) of Americans in the two lowest pre-retirement income brackets will run short 10 years out.
Meanwhile, Social Security benefits already are modest–the average benefit paid is about $14,000–about $6,000 less than it takes for an average senior to make ends meet, according to the Elder Economic Security Standard.
Against that backdrop, it’s hard to see why cuts in Social Security should be included in whatever cure we decide to take for the federal budget deficit.
November 23rd, 2010 at 5:12 pm
I can’t get too excited about the proposed cuts. Myself and probably alot of other SS recipients that are affected by the WEP and GPO have been putting up with these discriminatory cuts for a long time. Too bad that alot of the affected SS recipients have already passed on. I myself have been collecting social security for seven years, since I turned 65. I have calculated I have lost about $42,000 since I started to collect. My big social secrity check of $265 will probably just dwindle away to nothing.
Is not this pathetic. I contributed to Social Security for about 25 years and so did my husband. He passed on prior to retirement. A measely $265 for 50 years of SS deposits between us.
November 23rd, 2010 at 5:24 pm
Good clarification of Social Security Benefits; glad to hear the end of Social Security Benefits tactics we have heard of before are not true. I am a Social Security beneficiary and hope to continue to be until the end of my life, but I do hope that my children and grandchldren will be able to benefit from this.
November 23rd, 2010 at 5:46 pm
If we realy want ot save money, just get rid of the Dept of Energy who has never fulfilled its mission and the Education Dept that really hasn’t helped all that much either. Congress needs to look at what works and what doesn’t. Get rid of what doesn’t!
November 23rd, 2010 at 5:51 pm
A good synopsis of impending SSA problems. Two points:
1 – Federal retirees that have never worked in the private sector could probably care less. Not their problem. Those of us who got fed up and left for the private sector are very concerned – as we should be. We, however, will also be looking for them to reduce Federal retiree benefits; so hold onto your hat.
2 – Social Security was never intended to be all the income you would need in retirement. Those who think so will have to eat a lot of beans. Many of us saved, invested, worked 2nd jobs, etc. to create the other income we knew we needed. It’s hard to help some folks (particularly the ones that won’t help themselves).
Happy Thanksgiving.
November 23rd, 2010 at 7:59 pm
A ‘chained CPI” that takes substitution purchases into account?!?. They would lower COLAs because I’m substituting a lower cost and quality item due to the fact that I already don’t have enough money. Does this continue until I eventually substitute dog food for my meat?
I too paid in to the Social Security system for over 20 years when I first started working at age 14. Even though my earnings and contributions were small at the time, cutting what SS I receive by about 2/3 due to the WEP is totally totally unfair. I worked and contributed to SS during those years and I am denied the benefit! Ouh don’t get me started.
November 24th, 2010 at 1:32 pm
For many years now I have been hearing that the UNFAIR Social Security WEP and GPO would be repealed if any major Social Security change were made but I don’t see that included in any of these proposals. Please tell me that the repeal of these two gross benefit decreases will be repealed.
Thanks
November 24th, 2010 at 1:37 pm
I despise politicians who make up lies to forward their own, or their party’s, agenda. They are nothing more than a bunch of rich scum who punish the commoner working to survive the financial traps that they were brainwashed into participating in. Too bad there are too many commoners not paying attention to what is really going on. Again, not making the truth known is part of the brainwashing.
Take for instance the snake-oil salesman trying to sell us on the idea that harvesting wind energy is economically feasible with today’s technology. They are just trying to line their pockets before we get the new energy bills in the mail.
Don’t get me started either.
November 25th, 2010 at 4:23 am
WEP and GPO are theft. WEP and GPO were snuck through Congress for the sole purpose of stealing the EARNED benefits of current and retired federal employees. The fact is that when you buy a car, the tires are on the vehicle. When you buy a house, the roof is installed. You pay for that as you make payments. However, current and retired federal employees paid the mandated payments it Social Security (FICA Taxes) but because they worked for the federal government, it’s erased. It’s THEFT!!!! People who work in Private Industry all their life, get paid all of their EARNED benefits while those who chose to serve their country are tortured by GPO and WEP. REPEAL WEP and GPO NOW!!!! LIH
November 25th, 2010 at 4:24 am
REPEAL WEP and GPO NOW!!!!
November 26th, 2010 at 12:35 pm
Solution to the Social Security issue is to raise the cap on contributions from salaries to about $200K. Salaries have gone up for a long time, why not raise the SS cap? Even the rich people are going to collect SS eventually (they want what they put in as does everyone else), however it’s the middle class that always gets hit hardest on everything. Raising the cap would really make the most sense, is an easy fix, and would save a lot of taxpayer $$$ from being wasted on televised unnecessary congressional hearings. Please contact your congressional reps and tell them to vote for raising the salary cap on social security, and just get on with the business of running the country.
November 26th, 2010 at 3:37 pm
It is my understanding that our politicians only have to be in office one full term and they receive their entire salary for the rest of their lives. If this is true, why aren’t we the people doing something about it? How rediculous is this formula and do they even pay into social security? Even if they do, cutting social security benefits won’t be hurting them. We the people work 30, 40 or more years and if we are lucky, we might get half our salary upon retirement. Most of us do not. If they want to work on cutting the deficit by cutting social security and pension benefits, then we should cut out giving them their full salary for working one term. They should have to pay into social security, work for at least 30 years, and get less than half their salaries just like the rest of us. That would put a dent into our national deficit and also add money into the social security fund.
I also understand that they don’t have to pay for their health benefits either. It may or may not be true, but it would certainly clarify why they are not vested in truly fixing the rising cost of health care.
November 27th, 2010 at 1:36 pm
Joan: If you are saying you received a Social Security payment of $265 per month, I really doubt it. Your payment, and you say two of you contributed, would be much higher.
Are you referring to just the death benefit? That’s the same for everyone and admittedly too little to count.
I also wonder how you feel you “lost” $42,000? Details, please.
November 29th, 2010 at 4:39 pm
Bill, I paid into SocialSecurity for over 35 years. Paid on up tp 100,000 per year. I receive less than $650.00 per month from SS. Is this fair?