This Republican Social Security COLA Change Would Slash Benefits by $117 Per Month

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For the past 82 years, the Social Security Board of Trustees has released a comprehensive annual report that looks at the inner workings of Social Security and attempts to predict how financially “sound” the program will be in the short term (10 years) and long term . maturity (75 years). This report takes into account changes in tax policy, as well as a variety of demographic shifts, such as birth rates and net legal immigration.

Since 1985, every Board of Trustees report has warned that Social Security would not generate enough long-term revenue to support the existing payout schedule, including annual cost-of-living adjustments. As of the 2022 report, Social Security was staring through 2096 with a $20.4 trillion (and growing) cash shortfall.

If nothing is done to address this shortfall, a blanket cut in benefits to 23% from the Old-Age and Survivors Trust Fund — which pays more than 48 million retired workers their monthly benefits — may be necessary. 2034.

Image source: Getty Images.

Legislators on Capitol Hill have made no shortage of proposals to strengthen America’s best retirement program. Unfortunately, our country’s two political parties have approached these “fixes” from opposite ends of the spectrum, resulting in no significant change or consensus.

But there is one aspect of Social Security where Democrats and Republicans have found common ground: the COLA inflation measure.

Lawmakers agree: CPI-W should disappear as measure of Social Security cost of living adjustment (COLA)

Both major political parties in America agree that the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) does not account particularly well for the inflation faced by the more than 65 million Social Security beneficiaries each year. to have .

As I’ve explained in more detail, the CPI-W has eight major expense categories and numerous subcategories, each of which has its own percentage weight. This allows the CPI-W to be expressed as a single number, which can be easily compared to the previous month or year to determine the direction in which prices have moved for a large predetermined basket of goods and services.

The CPI-W has been the inflationary determinant of Social Security since 1975, and on paper it sounds like it would be the perfect measure of annual cost-of-living adjustment. But this has turned out to be far from the case.

The CPI-W tracks the spending pattern of ‘urban wage earners and white-collar workers’. These are often working-age Americans who spend their money differently than seniors, who make up the bulk of Social Security benefits. Ultimately, important expenses for seniors, such as housing and medical care, are underweighted by the CPI-W calculation. The purchasing power of Social Security income has fallen 40% since the turn of the century, according to a study by The Senior Citizens League.

This Republican proposal could reduce Social Security checks by $1,400/year

One of the main proposals being touted by Republican lawmakers in Washington, D.C. to strengthen Social Security and remedy the shortcomings of the CPI-W is to switch the program’s COLA tether to what is known as the Chained Consumer Price Index. The main difference with the Chained CPI is that substitution bias is taken into account.

In simple terms, substitution bias describes a situation where a consumer trades in for a similar good or service that is cheaper. This may include trading a branded product to a store-owned brand or purchasing chicken or pork because ground beef prices have risen.

The CPI-W and the Broad Consumer Price Index for All Urban Consumers (CPI-U) — (CPI-U is the main determinant of inflation that economists look at each month) — are adjusted every two years to account for deal with substitution bias. Meanwhile, the Chained CPI is adjusted monthly.

Substitution bias is a real consumer behavior. But if the Chained CPI became Social Security’s annual COLA measure, it would result in lower “increases.”

According to the Office of the Chief Actuary of the Social Security Administration, using the Chained CPI instead of the CPI-W would reduce annual cost-of-living adjustments by about 0.3%. After 30 years, a Social Security beneficiary would see their payout drop by $1,400 a year, or $117 a month, compared to what it would have been had the CPI-W stayed in place.

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Image source: Getty Images.

The CPI-W will likely remain Social Security’s COLA measure

On the other hand, the Democrats also have a proposal to replace the CPI-W. Their solution is to exchange the CPI-W for the Consumer Price Index for the Elderly, or CPI-E.

As its full name implies, the CPI-E would track the spending habits of seniors, rather than “urban wage earners and white-collar workers.” The Office of the Chief Actuary estimates that using the CPI-E instead of the CPI-W would increase the annual cost of living adjustment by an average of 0.2%.

While one solution probably sounds a lot tastier than the other (an annual COLA reduction of 0.3% versus an annual increase of 0.2%), the comparison between these two proposals is not as straightforward as you might think . For example, don’t forget Social Security’s long-standing cash deficit of more than $20 trillion.

In 2017, the Office of the Chief Actuary estimated that moving from the CPI-W to the Chained CPI would reduce the then-estimated long-term cash deficit by 21%. In comparison, the switch to the CPI-E from the CPI-W increased the long-term cash deficit by 14%.

Another thing to consider is that when Social Security started paying benefits on January 1, 1940, the average life expectancy in the US was about 63 years. As of 2021, the average life expectancy in the US was 76.1 years, according to the Centers for Disease Control and Prevention. Social Security was never designed to be leaned on by retirees for decades, but that has become a relatively common occurrence over time.

The point is that cost cutting is likely to be a key piece of the puzzle to sustain Social Security over the long term, and the Chained CPI may be part of those plans at some point. But for now, with Republicans and Democrats ideologically miles apart on how best to tackle Social Security’s problems, the CPI-W is likely to remain Social Security’s inflationary chain. That means there is a high probability that social security income will continue to lose purchasing power over time.

The Valley Voice
The Valley Voicehttp://thevalleyvoice.org
Christopher Brito is a social media producer and trending writer for The Valley Voice, with a focus on sports and stories related to race and culture.

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