Amid all the hubbub over possible cuts to Social Security benefits, many experts have asserted that today’s retirees will emerge largely unscathed. The reason: Many of the proposals being bandied about — including an increase in the full retirement age — focus on those who have yet to retire.
But in a recent report, the Center for Retirement Research at Boston College concludes that momentum is gathering behind a proposal that would affect current retirees, too. Backed by “two prominent” commissions* charged with reducing the federal debt, the proposal calls for changing the way the Social Security Administration adjusts benefits to keep pace with inflation. A switch — from the current approach to using a “chained” consumer price index — would reduce the rate of increase in benefits by about 0.3 percentage points per year, the report says.
“Thus, the change would result in lower cost-of-living adjustments (COLAs) for Social Security beneficiaries,” says the report, which adds: “Moving to a chained index should be viewed as a cut in benefits.”
Over the long run, such a change could make a big difference for retirees. By the time a young retiree reaches age 85, “a COLA that is 0.3 percentage points lower per year would produce a monthly benefit that is about 6.5% lower,” says the report.
Those in favor of the change say that, in addition to wiping out an estimated one-quarter of Social Security’s long-range deficit, it would provide a more accurate measure of inflation. Why? A chained approach captures the extent to which consumers — when faced with price increases — substitute one product or service for another. For example, the report says, they might eschew pricier analog watches in favor of cheaper digital ones.
But the report’s authors, who include fellow Encore contributor Alicia Munnell, point out that the current method of calculating COLA adjustments may actually shortchange the elderly, who devote an average of 13% of their budgets to health care, versus 5% for those under 65. Because health-care expenditures tend to rise faster than overall inflation, the elderly experience a rate of inflation that’s about 0.27 percentage points higher than the measure used by the Social Security Administration, says the report.
As a result, Munnell, a Boston College professor, and her co-author conclude: Any adjustment to the COLA “should take into account both the projected 0.30 percent overstatement due to not accounting for the substitution effect and the projected 0.27 percent understatement due to not reflecting the spending patterns of the elderly.”
* The National Commission on Fiscal Responsibility and Reform (co-chaired by Erskine Bowles and Senator Alan Simpson) and The Bipartisan Policy Center’s Debt Reduction Task Force (co-chaired by Senator Pete Domenici and Alice Rivlin).