SOCIAL SECURITY
Social Security is a perennial issue, and President Barack Obama is bringing it back to the forefront with his new budget proposal.
The problem
The crux of the problem with Social Security is that it doesn’t have enough money to cover its obligations in the long term. It began spending more than it collects in taxes in 2010, and it is projected to run through its $2.7 trillion in reserves by 2033. At that point, it would be able to cover only 75 percent of its monthly obligations through tax revenues.
It’s a slow-motion crisis driven by demographics: The Baby Boom generation began reaching the traditional retirement age – 65 – in 2011, and will continue crossing that threshold for another 13 to 16 years, depending on whom you count among the boomers. A system that once could count on five tax-paying workers per retiree to fund its obligations will, in the next few decades, see that ratio fall to less than 2 to 1.
The alternatives
The four most-often-cited proposals to keep Social Security fully funded are:
- Increasing and/or extending taxes. The Social Security payroll tax is 12.4 percent, divided evenly between workers and their employers. The AARP estimates a 1-percentage-point increase in taxes on each would close about 64 percent of the spending gap. Another proposal is to impose the tax or a surcharge on income above $113,700, the current cap.
- Increasing the retirement age. Part of a solution to a similar funding shortfall in the 1980's, was to slowly increase the age at which recipients could receive full retirement compensation to 67 from 65. Current proposals call for raising it to 69 or even 70.
- Overhauling the entire system to create something resembling 401k accounts, in which individuals would have tax-sheltered investments in stocks and other private funds, with the amount they eventually collect dependent on market performance rather than the current government-mandated sums.
- Changing the way cost-of-living increases in Social Security payments are calculated.
Obama’s idea - An original thought, I doubt it!
Obama in his budget proposal chose the fourth option. Annual adjustments in Social Security payments are calculated using the consumer price index, a measure of how much prices change for a “market basket” of typical goods and services, such as food, clothing, housing, transportation and entertainment. Obama calls for moving to an alternate measure of these changes, the so-called “chained” CPI, which assumes that consumers faced with price increases shift to cheaper items and don’t spend as much.
Using the chained CPI, this year’s Social Security cost of living adjustment would have been 1.4 percent instead of 1.7 percent. Over 10 years, the Obama administration estimates, savings from using the alternate measure would add up to $230 billion. (READ ROBBERY) It would provide an unspecified boost in benefits for those who rely for long periods on Social Security disability payments, and would exempt from the chained formula payment adjustments for people receiving means-tested aid in other programs, such as Medicaid.
Some of the sharpest opposition to Obama’s proposal has come from fellow Democrats, who see any erosion of Social Security as a betrayal of a promise to taxpayers. They point out that though the changes to Social Security payments from using the chained CPI would be initially modest, they would accumulate over the years, especially for recipients who live into their late 80s and beyond. Some Republicans have leveled similar criticism, though conservatives have generally favored a reduction in costs for entitlement programs. A more common complaint among them is that Obama, seeking a “grand bargain” on deficit reduction, couples his offer of Social Security cost-cutting with increases in other taxes, which they oppose.
In any case, the use of chained CPI alone is not enough to plug the gap between Social Security’s payouts and its revenues. Most proposals for dealing with the shortfall rely on a combination of ideas. So even if Obama’s proposal fails to gain traction, it could reinvigorate what will be a key issue in presidential elections until a solution is found.
What they said, “I think his inclusion of chained CPI is terrible. Here’s the first proposal by a Democratic president to start undoing the New Deal, and I hope that Democrats will oppose it down the line.”
“I don’t know if I would say that he cracked the door on entitlement reform. He has proposed to change a statistic, which saves money. That is really not entitlement reform.” House budget chairman Paul Ryan, R-Wis.
