September 3, 2015
Congress Considers New Proposal To Raise Social Security Benefits
Now is the time to modernize Social Security. The system has worked for decades but is falling on hard times. If nothing is changed, the Social Security Disability fund will be depleted by the end of 2016 and the Social Security Retirement fund will not be able to pay full benefits starting in 2033. This will put millions of Americans into financial crisis as those who have paid into the system and rely upon benefits will not have enough money to live in dignity and financial independence. In some ways the problem is simple; more benefits will be paid out than the current funding structure can support. However, the funding status is not the only piece of Social Security worth examining. In fact, the funding shortfalls give us a great opportunity to re-examine Social Security from top to bottom and update it to reflect the current state of the United States and its senior population.
Congressman Alan Grayson (FL-09) recently requested a Congressional Research Service(CRS) memo to show how the Cost of Living Adjustment (COLA) would have differed if the Consumer Price Index – Elderly (CPI-E) was used as opposed to the current relied upon Consumer Price Index Clerical Workers (CPI-W). The CRS memorandum shows that since 1982 the CPI-E increased by about .2% more per year when compared to the CPI-W. Ultimately, this would have resulted in higher Social Security benefit increases for the elderly, improving their retirement security. In fact, this would have resulted in more than $388 billion in additional Social Security benefits. According to Congressman Grayson, “the promise we made is to protect the purchasing power of seniors’ earned benefits against inflation. The CPI-E does this while the CPI-W does not.” In response, the Congressman has developed a piece of legislation entitled the “Seniors Deserve a Raise Act” that will be filed when Congress reconvenes. The proposed legislation would give current and future recipients of Social Security “a raise that offsets the entire 40-year shortfall, not just last year’s, and makes the CPI-E permanent.”
Besides just increasing benefits for retirees over this time period, a switch from the CPI-W to the CPI-E makes sense because it’s a better measure to accomplish the goal of COLAs. Social Security was designed to help seniors live in financial dignity in retirement by providing a guaranteed income stream that was protected against a decline in purchasing power over time due to the impact of inflation. Inflation is the concept that goods and services become more expensive over time. As such, one dollar today cannot buy one dollar of goods tomorrow. Furthermore, the impact of inflation is more pronounced over long periods of time as larger inflation begins to compound.
While the CPI-W is one measure of inflation, it does not necessarily show the impact of inflation on the elderly. For instance, inflation varies from country to country. It also varies across different goods and services. This means that the inflation or increase in the cost of an apple will not necessarily be the same for the increase in the cost of medical care. In fact, certain services and expenditures that senior Americans rely upon have experienced higher than average inflation. For example, medical costs and long-term care costs in the United States have grown at rates substantially higher than the average inflation rates. This has a bigger impact on seniors than the average American because seniors spend more of their money on medical costs. This is where the true value of the CPI-E comes into place. The CPI-E takes a look at where seniors spend their money and determines the true impact of inflation on their spending needs. As such, if the goal of COLAs is to protect seniors from a decline in their purchasing power throughout retirement, then the COLAs should be tied to the inflation levels that seniors experience.
The real impact of this change is hard to measure. On one side, the change would have resulted in higher benefits on average since 1982 by about .2% more per year. Even a small change like .2% per year will would result in a significant improvement in a retiree’s benefits over a 20 or 30-year retirement period. However, it would also be a substantial cost to the Social Security system. In fact, there has been research that says this switch from CPI-W to CPI-E would cause the Social Security fund to run out years earlier than currently expected. While history tells us the CPI-E has on average outpaced the CPI-W, it is not always the case every year. In fact, from 2006 to 2011 the average CPI-W rose at a higher rate than the CPI-E. But more recently, in 2014, the CPI-E was nearly 2.9% higher than the CPI-W. In fact, the CPI-E would not and has not always resulted in a higher measure of inflation. Instead, it is just a more accurate inflation measure to represent the impact of declining purchasing power on seniors. Congressman Grayson’s proposal would actually use the higher of the CPI-E or the CPI-W for COLAs.