What’s the hottest topic in Washington?
Behind universal health care, you can argue that it’s how to reduce spending and lower the deficit. Congressmen and lobbyists have thrown out many proposals, and it appears that even Social Security Benefits may not be immune to cutbacks. There is one proposal that we thought was dead…but now appears to be gaining steam. It might not ever pass, but it should be on your radar.
The Basics of the Proposal…not Scary (At First Glance)
When most people think of a cut, they automatically think of an immediate slashing of benefits. Based on past legislation, it’s unlikely we’ll see any cut that drops benefits overnight. Instead, experts agree that benefit experts will now change the method used to calculate cost of living increases to subtly lower the annual increase to your benefit amount.
What does that mean? Like boiling a frog by slowly turning up the heat, initially it’ll feel like nothing. However, the long term effects would be huge. Every year your Social Security benefit will keep up less and less with the rising cost of living.
Understanding the Cut: How Cost of Living Increases Work Now
The Bureau of Labor Statistics calculates Social Security cost of living increases using an inflation measurement know as CPI-W (Consumer Price Index for Urban Wage Earners and Clerical Workers). This index measures changes in the prices of goods by gathering data from retailers. When prices rose, the CPI-W would increase and the following year Social Security benefits also would rise to meet the higher cost of goods.
How has this worked historically? In most years there has been an increase but in some years where inflation is low, such as 2010 and 2011, benefits remained the same.
Changing the Measurement
Creating a decrease in future Social Security benefits is simple; instead of using the CPI-W, it could be replaced with a relatively new measurement call the C-CPI-U (Chained Consumer Price Index for all Urban Consumers). You may have heard cable money shows refer to this measurement as simply “Chained CPI.”
How is Chained CPI different? Instead of simply measuring price changes, this measurement of inflation assumes that consumers will change their purchase habits when prices increase—simply buying less, for example, or switching to store brands from more expensive brands.
So how much of a decrease in future benefits could you expect? The Congressional Budget Office has forecasted that a switch to Chained CPI would cause Social Security Benefits to increase by a quarter of a percentage (0.25%) less each year than they would if the government continued using the CPI-W.
The effects over time would be huge. The Congressional Budget office has further forecast that benefits would drop by only $1.4 billion in the first year using Chained CPI, but by the tenth year payments drop by nearly $22 billion each year.*
Using simple math, this seemingly little adjustment would reduce Social Security spending by approximately $115 billion dollars over the next ten years. You can see why lawmakers have this option “on the table.”
How Could This Impact You?
I know what you’re thinking: what does this mean for my benefit if I’m an average recipient of Social Security?
Using the current methodology, if your monthly benefit is $2,000 today and we assume inflation of 2% per year, you could expect to see a monthly benefit amount of $2,438 in 10 years.
If the method switches? Using Chained CPI we’d reduce the cost of living adjustment to only 1.75% per year. That means the monthly benefit would be $2,379 in 10 years. While it seems like only a small cut, that actually $708 less per year. Running the same calculations out to 25 years, you would feel a difference of $2,352 less per year.
For some, that may still seem like a not-very-noticeable change. But for the one-third of all of Americans who rely on Social Security for 90 percent of their income it’s the difference in being able to pay a water bill, groceries or some other essential need.
What’s the point? When you hear discussions about Chained CPI…let your voice be heard. It’ll affect your wallet more than you’ll initially feel.