What deficit cutting would mean for Social Security
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The Social Security reform trial balloon is floating. How high will it go, and what would it mean to beneficiaries?
The draft plan released today by the national deficit commission co-chairs Alan Simpson and Erskine Bowles contains long-term changes to Social Security composed roughly of two-thirds benefits cuts, and one-third revenue hikes.
Social Security today runs a huge surplus, but its trust fund will be exhausted in 2035 if adjustments aren’t made. The shortfall really has nothing to do with today’s federal budget deficit, but the commission is making recommendations here all the same to deal with the fund’s long-term solvency. The proposals from Simpson and Bowles would be phased in over time; here are the three most important cuts to benefits:
1. Benefits formula: Simpson and Bowles recommend some highly technical changes to the formula used to determine benefits. This is the biggest single change, reducing the Social Security Trust Fund (SSTF) long-term shortfall by 45 percent. These changes would affect the way Social Security averages workers’ lifetime earnings to determine benefits.
2. Boost the retirement age. The full benefits retirement age would rise 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 retire. Earlier this year, advocates at Social Security Works calcluated that raising the full retirement age to 70 from 67 would reduce lifetime benefits by 19 percent for a worker entitled to a monthly payment of $1,000.
Working longer is a key strategy for improving retirement security — for knowledge workers and professionals best positioned to pull it off. It doesn’t work well for workers who do physically demanding low income jobs. Simpson and Bowles are recommending a “hardship exception” for certain occupations where working longer isn’t an option, but the devil will be in the details. Ask anyone who has struggled to qualify for Social Security disability payments — the process is long and complicated.
3. COLA changes: Simpson and Bowles recommended changing Social Security’s cost-of-living adjustment (COLA) formula. This change will be especially controversial, since the change will reduce inflation increases and it would be phased in starting in 2012. That means it would impact not just future beneficiaries, but today’s seniors.
Simpson and Bowles propose replacing the current measure — CPI-W — with a new “chained CPI” that takes into account “substitution purchases” consumers make to avoid high prices. The “chained” CPI is expected to rise 0.3 percent less annually than the CPI-W.
The COLA is one of Social Security’s most valuable and important benefits, although no COLAs were awarded this year or for 2011 due to the current low rate of inflation. Shifting to a chained CPI would diminish the long-range Social Security shortfall by about 25 percent.
Critics of this reform argue that the chained CPI doesn’t reflect accurately the inflation seniors experience, since they spend a higher portion of income on health care, where prices are rising much more quickly than general inflation. Indeed, research by Fidelity Investments shows that retiree healthcare expenses this year are 4.2 percent higher than in 2009, and have jumped 56 percent since 2002. By contrast, overall consumer prices are up just 1.1 percent so far this year. Soaring medical costs are a major contributor to rising rates of bankruptcy filings by older Americans.
Revenue: Simpson and Bowles proposed one significant revenue increase to support the SSTF. The maximum percent of wages taxed (via the payroll tax) would be increased gradually to cover 90 percent of wages by 2050. It’s complicated, but the bottom line is more income would be subject to taxes.
Photo: A hot air balloon flies in the early morning. REUTERS/Toby Melville
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Let’s call it what it is, folks… the “greatest generation” and the “baby boomers” are unwilling to “suffer” for the actions of their own elected officials. It’s far better to pass the buck to your children and grandchildren, right?
The government that YOU elected has squandered your social security and medicare contributions on the false premise that they next generation’s contributions would refill the empty coffers. They were wrong, and now you expect US to bail you out?
You enjoyed prosperity for decades- greed took root and you (and your government) lived far beyond your means. What legacy do you leave behind? An insurmountable trade deficit, a weak dollar, massive private and governmental debt, a global economic depression and bankrupt social security and medicare programs. Thanks.
So… now you have the NERVE to ask your children to pay more taxes to fund your retirement and medical expenses? Good luck with that…
I have a simple solution to the Social Security fiasco:
- The money paid out in this year must be exact equal to the money taken in in previous year
So this year only $100B come in, next year only $100B come out. Plain and simple.. the elderly should stop whining, this is fair!!
I knew the GOP won the election… Two things happened: 1) My social security check was late, and now they announced that the benefit will be cut…. Way to go GOP….
The auto industry companies give retirement benefits (75% of the last drawn salary plus medical) after 25 years of experience. These companies also try to lay off employees as much as possible when they cross 22 years of service. I know, one off my colleague bought some insurance, which covered him when he was laid off after 22 years of service for no reason, as expected.
How about introducing a similar private insurance for complementing social security benefits?
@Holiwud111
Bravo!
The older generations never take responsibility for anything. They continue to vote in the crooks. They are the ones who could not budget any money themselves. They are the ones who let the unions die and the jobs get outsourced. Let them suffer for their own greed.
I am lost for words. All I can say, “We, the people, are DONKEYS!”
Senator Simpson (and Erskine Bowles, for that matter) are completely out-of-touch with what Social Security means for older Americans who will be dependent on the government owing to the private sector’s inability to fund defined benefit pensions after 1970. Maybe they should not have so actively supported the outsourcing of American jobs to China and the destruction of the American economy. Now they are experts on pension programs as well!? They should both be removed as ignorant reformers of a system they obviously don’t understand. Furthermore, Social Security funded the pensions of persons retiring starting in 1940 after only small contributions (not the 38-year span currently paid by Americans covered under the system); it is this shortfall from the initial “break-in” period that was unfunded and the addition of such programs as SSI that have led to the breakdown of the current system. The system itself needs a funding ‘bailout’ from general revenue owing to the misconceived obligations tacked on in later years and the unfunded “break-in” period when everyone started drawing pensions without payment. Why are we penalizing the folks that have paid religiously for 38 years when the government itself never funded the program properly to begin with?
Mr. Holiwud; aren’t you just the smartest thing! Since you are obviously so much smarter than us old folks, better at planning for your retirement and electing more competent policians, we may as well just spend everything we can; you’ll surely have no need for Social Security or Medicare! Good luck with that.