How the Supercommittee Deficit Plan May Affect Seniors

Failure to agree on a plan would trigger modest cuts to Medicare but spare Social Security and Medicaid.

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The Congressional Joint Select Committee on Deficit Reduction—aka the "super committee"—is still in partisan posture mode. Right now, we know what the Democrats and Republicans will and won't accept. But we know little of what the committee actually will do.

For older Americans, the best short-term outcome might just be failure. If the committee cannot adopt a package of at least $1.2 trillion in budget cuts, automatic budget cuts would occur. To avoid this outcome, an agreement needs to emerge by Thanksgiving and Congressional passage must occur by January 15.

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Those mandatory cuts, however, would totally exclude Social Security and Medicaid. They would include a 2 percent reduction in Medicare spending each year from 2013 to 2021. And they wouldn't begin until 2013—after the Presidential election.

Even then, seniors would not feel as much as a bee sting for some time. That's because the cuts will come in what the government pays for Medicare. There will be no cuts in mandated benefits that people receive from Medicare, and it will take insurers some time to figure out how to respond to these revenue cuts. They could raise premiums for those Medicare policies that expand beyond basic Medicare. They could increase co-pays, raise some out-of-pocket spending ceilings, and increase drug prices, among other options. Such adjustments, however, would take time, and we're still talking about a modest 2 percent "hit."

And while $1.2 trillion seems like a big number, it's not so big when it's spread over nearly a decade. In the case of Medicare, the 2 percent reduction has a nine-year price tag of $123 billion. The cuts for fiscal year 2013 are projected by the Congressional Budget Office to total about $11 billion. They would rise each year to $17 billion in fiscal year 2021, in part to accommodate rising Medicare expenses tied to growing numbers of retired baby boomers.

[See 2012 Social Security Payments to Rise 3.6%.]

While gridlock on deficit matters would hardly be surprising, senior advocates are concerned about committee proposals that would include more serious cuts to not only Medicare but also Social Security and Medicaid. And even if there are no material cuts in the near future, no one expects the pressure for cuts to go away. In fact, the supercommittee usually has wide-ranging powers.

It could, for example, approve a smaller deficit reduction package and instruct Congress to come up with additional cuts. This might trigger smaller automatic spending reductions that would be acceptable to a Congressional majority, particularly when it comes to defense cutbacks. It also could extend deliberations until after the elections, at which time control of Congress and the White House might have shifted.

And while most proposals to reduce senior benefits would affect only future retirees, that's not the case with the most likely idea for trimming Social Security benefits, according to David Certner, legislative policy director at AARP.

"On the Social Security side, there is one big issue on the table, and that's adjusting the cost of living [COLA] formula," he says. The COLA is now tied to annual changes in consumer prices using a government index of urban wage earners. There is considerable support for replacing this with an index known as the "chained" consumer price index (CPI). The chained CPI assumes that higher prices for one product won't raise actual consumer spending by that amount because consumers will shift their purchases to less expensive substitute products. The chained CPI thus would rise more slowly over time than the CPI for urban wage earners, and result in smaller increases in the annual Social Security COLA as well as many other federal payments.

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Certner says projections of the impact of using the chained CPI are that it would reduce COLA increases by a projected $112 billion over 10 years. "This would be a cut for current seniors," he notes, "and the cut gets bigger as you get older." For example, if the COLA was reduced by $20 a month each year from what it would have been, monthly Social Security payments would be $40 lower after two years, $60 lower after three years, and so on.

Even larger dollar cuts are being discussed for Medicare and Medicaid, he says. The major Medicare change would raise the eligibility age from 65 to 67, Certner says, and also increase the amounts that beneficiaries pay for home health care and other services. There also are discussions of a surtax for premiums on Medigap policies, which are now purchased by more than nine million seniors to supplement basic Medicare coverage. And higher-income seniors could be asked to pay "a lot more" for Medicare benefits, he says.

For Medicaid, which is relied on by millions of lower-income seniors, there are proposed spending cuts and also suggestions for switching more program expenses to state governments. Besides noting that state budgets are hardly able to absorb such increases, Certner also points out Medicaid's home and community-based services might be the first areas to be cut, representing a "huge problem for seniors."

Twitter: @PhilMoeller