5 ways a big deficit deal will whack your retirement

July 21, 2011

If Washington strikes a big deal on deficit reduction to avoid debt default, it’s going to be bad news all around for older Americans.

The debt crisis negotiations may yield no more than a short-term Band-aid and sidestep long-term changes in spending policy. But it’s clear that the Obama Administration and some lawmakers are reaching for a big deal patterned on ideas developed by politicians positioning themselves as bipartisan budget peacemakers.

So, while average Americans worry about the ongoing jobs crisis and vanishing retirement security, lawmakers and the President make plans for deficit reduction that will whack vulnerable older Americans.

Many of the spending cut ideas come from the final non-report of the President’s own deficit commission. (I call this a non-report because co-chairmen Alan Simpson and Erskine Bowles couldn’t muster the votes needed from commission members under their own rules to report out a final document, yet Washington accepts what the co-chairs issued as an official document). Other key ideas are embodied in the bipartisan plan du jour presented by the on-again, off-again Gang of Six.

Watch out for these possible blows to retirement security as the debt default deadline approaches:

A higher Social Security retirement age.
Simpson and Bowles call for raising Social Security’s full and early retirement ages. Their changes would effectively reset the full retirement age to 68 by 2050 and 69 by 2075; the early retirement age would rise to 63 and 64 in those same years. That comes on the heels of the increases already made in the 1983 reforms, which moved full retirement age to 67 in 2022.

Simpson-Bowles and others have argued that higher retirement ages are justified by the population’s rising longevity, but it’s really just a back-door benefit cut for everyone, no matter when you file for benefits. That’s because your monthly benefit is determined by the normal retirement age (NRA) at the time you file; if you file before your NRA you’ll be penalized, and if you file later you get an eight percent bump in monthly payments.

Moreover, longevity gains have been concentrated among more affluent Americans, and a higher retirement age is an implicit signal to work longer. Just ask anyone in their 50s or beyond how easy it is to keep or find employment these days.

The 1983 change in retirement age cut benefits an average of 13 percent; a further push to age 69 (from 66, where it is today) would cut benefits 20 percent from current levels, according to the National Academy of Social Insurance.

Adopting a chained CPI COLA.
Simpson-Bowles and several other plans call for changing the way inflation is measured for automatic annual cost-of-living-adjustments for Social Security and other programs. We’d be moving from the current CPI-W measure to something called the “chained CPI.” A chained index reflects changes that consumers make in their purchasing across dissimilar items in response to price changes; the theory is that a spike in gasoline prices will prompt consumers to spend less on fuel, but perhaps more on food. Coberly – a reader of my earlier post on this topic — offered a good summation of what it means:

The chained CPI is a scam. It’s a cowardly and dishonest way to cut benefits for people who are already living on the poverty line… benefits that they paid for themselves. Sure, when the price of steak goes up, people switch to chicken. And when the price of chicken goes up, old folks will switch to cat food.

Unlike some of the other bipartisan proposals, the chained CPI will impact today’s seniors. Over time, it hits the very old hardest, because the reduced COLAs compound over time. If anything, we should be moving in the other direction by adopting the CPI-E, which does a better job measuring healthcare and other costs facing seniors. The CPI-E has increased about 0.27 percentage points faster each year than the CPI-W.

Boosting Medicare’s eligibility age.
Some of the bipartisans want to push Medicare eligibility from 65 to 67. That just shifts health care costs from Medicare to seniors, and also to the new public exchanges set to launch in 2014 and to Medicaid.

Various bipartisan plans also call for curtailing the popular Medigap insurance policies, which protect seniors from catastrophic expenses and pay certain deductibles. Restricting Medigap coverage could save Medicare up to $4.6 billion per year on its share of seniors’ healthcare costs by discouraging utlilization.

Repealing the CLASS Act.
Simpson-Bowles and the Gang of Six both call for repeal of the CLASS Act, a little-noticed provision of the Affordable Care Act that creates a public option for long-term care insurance.

The Community Living Assistance Services and Support plan (CLASS for short) aims to fill the country’s yawning gap in long-term care (LTC) protection by offering modestly-priced coverage that emphasizes more flexible, community-based care over nursing homes.

The law mandates that the plan be self-funded through enrollee premiums, but critics charge it won’t be financially sustainable and will create a long-term drag on the federal deficit.

Medicare covers only a tiny portion of LTC needs; currently, 40 percent of all care is funded through Medicaid, which in most cases requires beneficiaries to spend down assets to poverty levels in order to qualify. Privately-offered LTC insurance remains a mass-affluent product with low market penetration.

Reducing 401(k) tax breaks.
The bipartisans want to reduce the tax deduction on retirement account contributions. Simpson-Bowles recommended capping combined employee/employer pre-tax contributions to 401(k)s at $20,000 or 20 percent of income, whichever is lower. That would be a substantial cut in deductibility, since the employee deduction alone currently is capped at $16,500 (savers over age 50 can make additional $5,500 “catch-up” contributions).

The reduction would be part of a broader set of reforms of “tax expenditures” — that is, revenue the government foregoes through deductions, exclusions or exemptions. Overall tax expenditures — which also include deductions for big-ticket items such as mortgage interest and employer health plans — are worth more than $1 trillion a year.

15 comments

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[…] Read more about plans to cut Social Security benefits for future generations of American elderly at Reuters. […]

Posted by Social Security Cuts as Deficit Concession to Republicans | Expert Financial Planning | Report as abusive

The greedy rich who run this country are governing through violence–threatening people’s lives with policy changes like this is every bit as violent as putting a gun to someone’s head. We must kick the rich out of government and give it back to the people. No votes for the rich!

Posted by Medusa | Report as abusive

Ahh, yes, but another article expounding the notion that targeting US seniors IS THE SOLUTION to resolve the US debt crisis.

I would love to see Reuter’s publishing articles on tax loopholes for mega-corporations and the wealthy. I would be most interested to know how the weatlhy would suffer if they had to pay FULL taxes (ie no more loopholes) or even worse, if they had to pay higher taxes like pretty much everyone else in the developed world.

Posted by Anthonykovic | Report as abusive

The previous comment is right on. We wouldn’t be in this debt crisis if tax revenues were like in the old days. Back then capital gains were taxed as ordinary income for holdings of less than one year and at one half that if held longer. Now the big money speculators who are ruining our country are only paying a fixed 15% while the rest of us who earn ordinary income pay more. And the Republicans have the gall to say ‘no new taxes’ on those who create jobs. What rubbish. A total lie. What we need are not ‘new taxes’ but the ‘olt taxes’ that used to work. In fact it is interesting that in the early 1970’s the maximum tax bracket was 90% on income over $100K (euql to around $1M now) and unemployment was around 3-5% and terest rates were around the same. Of coourse we mustn’t forget the expense side due mostly to the WARs which not only are draining our exchequer but costing and ruining lives while making enemies for us. And meanwhile Bernanke (like Greesnspan) continues to flood our economy with ‘funny money’ thus ensuring that it will inflate another 10-fold and thus wipe out our debts while effectively taxing those of us 80% on our interest income by essentially depriving us of any. And of course none of these reporters seems to know what ‘asymptotic’ means as our debt grows ‘exponentially’ and ‘asymptotically’ (ie the curve is hitting the ‘brick wall of reality’ on the horizontal – time- axis).

Posted by Eric93 | Report as abusive

We need a “Square Deal” type of budget cuts plan. All of this Far Right vs Far Left gamesmanship is killing this country.

Yes entitlements have to be trimmed …but so do all the loopholes and advantages given to multinational corporations and big banks.

We need to get real in this country before it is too late. Our government serves the multi nationals , big banks and the health care industry on one side of the extreme. And it serves the disenfranchised, socialists and nonproductive types on the other side of the extreme.

Posted by Gen | Report as abusive

There is no “right” answer here. In fact I’m not sure what the question is. The Dems mantra of lets raise some taxes on the wealthy really doesn’t work. The wealthy “whoever they are” are the people who finance and own those businesses (large and small) that provide jobs for the rest. They need to compete in an ever more competitive global market. Unfortunately that means ever shrinking profit margins in order to compete. So you can translate “more tax on the wealthy” to really mean less jobs in the U.S. for the less then wealthy. Additionally the Dems are politically in bed with Unions and are trying to protect their interests at the expense of the country…translated to mean “the rest of us”. The Republicans have an ever more radical Libertarian bend that gets in the way of pragmatic economic policy. Their zealotry reminds me of fascists. They somehow (ignorantly) want to take us back to “Little House of the Prairie” economics. In this global market? Heck many of the worst recessions and depressions in U.S. history came when we had small govt, no welfare programs, and a gold standard. Didn’t work then. Certainly won’t work now. If the Republicans now get their way I predict the U.S. and then world economy will be thrown into the economic abyss. We will see the economy contract and we will head into the worst depression in history. So name your poison. It is the year of the Idiot.

Posted by pablo222 | Report as abusive

The biggest problem is that raising taxes is not the answer. Between federal, state and local taxes we tax over 40% of GDP. So raising taxes is the wrong idea. If you go stops after the very rich, they will avoid taxes. Nothing
Warren Buffet from paying more now except he does not want to. He says he does and u believe him. All they will do is move to a different country. They can. Cut spending is the only way. When Clinton left office he was spending 1.7 Trillion. Obama is spending 3.7 Trillion. More than double in 10 years. 2.5 Trillion would be more appropriate. a 50 % increase in 10 years.

Posted by costag1 | Report as abusive

We need to encourage companies to stay in this country and hire from this country. Companies are not bad people. They are comprised of many people. Hopefully they can be comprised of more americans. Raise taxes on those companies that hire or export workers but more importantly decrease taxes for those that higher americans. My company is slowly moving to Ireland. There they can pay a 12 % tax as compared to 35 % here. To encourage companies to higher americans. eliminate the corporate tax and add a national sales tax and a tax on companies that produce goods over seas.

Posted by costag1 | Report as abusive

Some problems are simple to solve. If the Democrats think taxes are unbalanced, with the over 250’s paying too little a share and the under 250’s paying too large a share, they can join the Republicans in a bipartisan reduction in taxes for the under 250’s, until whatever balance they want is achieved. Problem of balance solved!
This would take away some of the pain of reduced entitlements, but would require a more serious approach to government spending reductions. But it would decouple the tax problem from the debt problem. If both sides could concentrate on debt, and forget about taxes, we could then make progress.

Posted by Retired003 | Report as abusive

One of the easiest and simplest solution on the SSA side is to remove the cap on taxation. Equitable? Of course. Yet another reason Republicans won’t support it.

Right now, you stop paying into the SSA fund at $106K. Any good reason other than kissing the butt of upper middle class voters?

The NY TIMES surveyed readers several months back – not exactly a poverty line crowd – and 76% supported ending the cap.

Posted by Eideard | Report as abusive

These changes seem reasonable and may not support the dramatic title of this article.

Posted by Mott | Report as abusive

Quite simply, the system is rigged for the rich and against every one else. I fear revolution and violence is on the way.

Posted by neahkahnie | Report as abusive

@AnthonyKovic

Without the corporate tax loopholes we would lose many large corporations. We do have the second highest corporate tax rate in the world. We could actually lower the corporate tax rate 10% and close the loopholes and bring in more money and be more competitive. But instead the government taxes the little guys at the second highest rate in the world, and lets the large guys get buy without taxes.

Posted by TheNewWorld | Report as abusive

Why is it that Federal debt to its own citizens (excluding the top 5% by income or assets) is not considered to be binding, but that debt to foreigners and the wealthy are sacrosanct?

What nonsense! We need a new Constitution that excludes the rich and corporations from office, political contributions, and voting. Who needs them? Most of the ones we now have are pure parasites. Permitting them to own assets in the USA is an “entitlement”. How about we cut a nice fat percentage of that particular entitlement?

Posted by txgadfly | Report as abusive

If they raise the retirement age, they must also have age discrimination legislation with teeth like a saber tooth tiger.

They must put he burden of proof on the employer, not the employee.

Posted by kanawah | Report as abusive

[…] Social Security advocates don’t agree on what might happen. […]

Posted by Answers to the 7 big “what-ifs” of debt default | Reuters Money | Report as abusive

[…] Medicare. And the White House has already signaled its readiness to cut these benefits as part of a grand bargain during the debt ceiling […]

Posted by 8 ways the super committee is not super for retirement | Reuters Money | Report as abusive

[…] of this comes against a backdrop of sharply-escalating costs and deteriorating retirement security for seniors. Most disturbing, the ideas on offer do very little to address the cost of health care […]

Posted by Should rich people pay more for Medicare? | Reuters Money | Report as abusive

They’ll do away with the standard deduction, too. That’s going to slap a large tax on the middle class and lower classes.
I hope they do away with exemptions, too. Pay for your own kids!

Posted by Skeptician | Report as abusive