8 ways the super committee is not super for retirement

August 5, 2011

social security super committeeSocial Security and Medicare will be in the sights of the Congressional “super committee” that will be looking for $1.5 trillion in federal spending cuts under the terms of the debt ceiling agreement. That means the financial security of seniors and Boomers nearing retirement will be on the line, so let’s consider the outlook for these vital programs as the negotiations get underway.

If the super committee can’t reach agreement — or if Congress rejects its recommendations — automatic spending cuts would be triggered, with Social Security, Medicare and Medicaid exempted. So a stalemate would mean status quo for the “big three” entitlement programs. But if the committee reaches agreement on a deal with no tax hikes or new revenues, all three programs could would face dramatic cuts. The committee must wrap up its work by November 23, and Congress would have until December 23 to vote.

Democrats and Republicans must nominate the super committee’s 12 members by August 16, and the selections will offer the first solid indications on how retirement benefits might fare. Early indicators aren’t encouraging.

Republicans have already made clear that all its nominees will come from the ranks of tax hawks looking for spending cuts only. And the list of Democratic front-runners include several members of the Gang of Six, a bipartisan group of senators that offered a $3.75 trillion deficit reduction plan last month that included Social Security benefit cuts.

The super committee will need a simple majority to issue recommendations to Congress. So, unless the Democrats appoint six members strongly committed to protecting entitlements, a majority could very well support cuts to Social Security and Medicare. And the White House has already signaled its readiness to cut these benefits as part of a grand bargain during the debt ceiling negotiations.

Here are eight ways that the the super committee’s work could hurt retirement security:

1. By considering Social Security at all. Social Security shouldn’t be part of the deficit reduction debate. The Social Security Trust Fund (SSTF) runs a surplus and doesn’t contribute a dime to the deficit. Yes, the SSTF has a long-range problem in that it is projected to run out of money in 2035, at which time Social Security could fund only 76 percent of benefits. We need to fix that, but it’s not a deficit problem.

Anyway, the best solution doesn’t have a prayer in the current Washington climate: lifting the cap on income subject to FICA taxes, now set at $106,800. Lifting the cap to cover $190,000 of income closes 31 percent of the gap, while complete removal closes 99 percent of the shortfall.

2. Chaining the CPI.The Simpson-Bowles deficit reduction report 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.

This is the only way to get near-term savings from Social Security, since it reduces benefits for current retirees. By contrast, a higher retirement age would have to be phased in over many years. A chained CPI could be implemented as early as 2013. The chief actuary of the Social Security Administration estimates that the chained CPI will rise about 0.3 percentage points less per year than the inflation measure used now, the CPI-W. With compounding, it’s a loss of 8.4 percent for a retiree at age 92 (calculated from age 62, the first year of eligibility), according to the National Academy of Social Insurance.

3. A higher retirement age. The Simpson-Bowles report calls for increasing Social Security’s full and early retirement ages, effectively resetting 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 would be a huge across-the-board benefit cut; if fully implemented, benefits claimed at ages 65 or 66 would be about 13 percent lower than they would had the retirement age not been boosted.

4. A higher Medicare eligibility age. Raising the eligibility age from 65 to 67 was proposed during earlier phases of the deficit debate. This would push more older Americans to buy insurance in the new public exchanges under the Affordable Care Act or onto Medicaid. It also would mean fewer total years of coverage, on average, for most seniors.

5. Medicare vouchers. Rep. Paul Ryan (R-Wisconsin) almost certainly will be a super committee member; expect the Republican side to push for his Medicare voucher plan, which already has the backing of the GOP House of Representatives. Republicans have taken a political beating on this issue, but may now think it’s time to take another run at it, given their success in the debt ceiling fight.

6. Higher Medicare out-of-pocket costs. Higher Medicare co-pays and deductibles could be proposed, along with new limits on first-dollar coverage under Medigap supplemental policies aimed at discouraging health care utilization.

7. Cuts to Medicare providers. The automatic cutting trigger would reduce payments to Medicare providers by 2 percent starting in 2013. Medicare already is scheduled to reduce pay to physicians by 30 percent at the end of this year, a move scheduled since 2003 but postponed ever since. The super committee could propose further cuts but reductions on this scale certainly would affect availability of services.

“You’ll have a Medicare program, but doctors will just refuse to be part of it,” says Max Richtman, CEO of the National Committee to Preserve Social Security and Medicare.

8. Means testing. Higher Medicare premiums for affluent seniors have been proposed; so has means-testing of Social Security benefits. It sounds reasonable – after all, why do Warren Buffett and Bill Gates need these programs? The reality is different.

Setting aside the extremely wealthy, plenty of affluent Americans who don’t think they need Social Security are glad to have it when they reach very advanced ages and have exhausted other resources. Just as important, Social Security and Medicare are social insurance programs, which means they provide benefits without requiring proof of need. That insures broad public support for the programs, and avoids the stigma of welfare.

“I do a lot of town hall meetings with congressmen all over the country,” Richtman says. “I always, always ask seniors in the room, how many of them are on Social Security and Medicare – and they all are. Then I ask how many are ashamed to be on these programs? No one is. Finally, I ask how many of them would be proud to be on welfare. No one raises their hand.”

“It would be the beginning of the end of social insurance in this country,” he adds.

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