It’s no secret that changes are needed in Social Security. The federal program is headed for insolvency in the next decade. While Social Security isn’t in danger of going bankrupt, it won’t have enough money to fund benefits at current levels if nothing is done.
There are many options on the table for establishing and improving social security. President Joe Biden promotes several ideas. This is the biggest social security change Biden wants to make.
A COLA with more pop
Every year, Social Security beneficiaries eagerly await their annual cost of living adjustment (COLA) amount. These increases are intended to help individuals deal with inflation.
However, there is a downside to the way COLAs are currently calculated. It’s such a big deal that a Senior Citizens League survey last year found that Social Security benefits have lost 32% of their purchasing power since 2000.
The Social Security Administration (SSA) uses a metric called the Consumer Price Index for Urban Wages and Employees (CPI-W) to calculate the COLA each year. The SSA determines the difference in the average CPI-W in the third quarter of the current year with the average in the third quarter of the previous year. The percentage increase (if any) is the COLA Social Security beneficiaries will receive over the next year.
President Biden wants to change the measure used by the SSA from the CPI-W to the Consumer Price Index for the Elderly (CPI-E). The CPI-E focuses specifically on the spending habits of Americans aged 62 and older, while the CPI-W looks at the spending of all urban workers. In particular, the CPI-E gives a higher weight to health care costs, which tend to be higher for older Americans.
Using the CPI-E instead of the CPI-W to calculate COLAs would almost certainly lead to larger increases in most years. We’re not talking about a huge difference. The Senior League found that COLAs based on the CPI-E would have been on average about 0.25% higher than the increases using the CPI-W between 1983 and 2000. However, over time, this small difference would increase and translate into significantly higher social security benefits.
More impact for more people
President Biden also wants to make several other changes to Social Security. However, changing the metric used for COLA calculations would have a greater impact on more people than his other proposals.
Biden, for example, wants to raise the salary cap for Social Security payroll taxes. This change would only affect Americans earning more than $400,000 a year.
The president also wants to pay more to Social Security recipients who have been on benefits for at least 20 years. Again, not everyone would be affected by this proposal.
Biden also believes that Social Security should have a higher minimum benefit. His plan is to provide benefits equal to at least 125% of the poverty line for anyone who has worked for 30 years or more. Of course, many Social Security recipients already receive benefits above this threshold.
The bottom line is that changing the COLA calculation method, as Biden wishes, would affect each person receiving social security benefits. Biden’s other proposals would only affect some Social Security recipients.
How likely is this change?
You may have noticed the main problem with using the CPI-E instead of the CPI-W to calculate Social Security COLAs. This change would cause the federal program to spend more money than it already does. And it would exacerbate the looming insolvency problem.
Because of this drawback, this particular proposal is unlikely to be implemented on its own. However, there are other ideas for establishing Social Security that are receiving widespread bipartisan support. It is entirely possible that the COLA calculation change could be added as a “sweetener” to a general Social Security reform package.