For Seniors, There Are No Small Benefit Cuts

As the budget debate intensifies, the true cost of possible senior cuts is starting to emerge.

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Have you seen AARP's ads opposing cuts to Social Security and Medicare? They are tough. The message, forcefully delivered by a senior speaking to the camera, is that there are 50 million older voters watching what Congress does. If these popular entitlement programs are cut, he implies, the legislators who voted for the cuts will have their heads handed to them on Election Day.

AARP's solution is to cut waste and not the hard-earned benefits of America's older citizens. It makes for a satisfying sound bite. But we are never told how much waste there is to cut. In part, that's because one man's waste is another man's valued spending program. But the larger truth is that there is simply not enough waste to close our enormous budget deficit.

[See Social Security's Long-Term Outlook.]

Yet we continue to trap ourselves in a looping film clip that depicts a constant search for painless cuts. If only we can find that magic combination of cuts that won't actually hurt anyone, we could script an end to this fiscal nightmare.

Only we can't. Yes, there is a divisive ideological standoff over raising taxes to help close the budget gap. But the larger reality is that we need to make big cuts in worthwhile programs and that such cuts will inflict serious hardships on decent Americans who deserve better. Who wants to deliver such a message?

A case in point is the current discussion about taking a whack at Social Security. Never mind that the program has stable funding, does not directly add to U.S. deficits, and will pay for itself fully for more than 25 years if nothing is done to change it. I wish my financial future was so sound. Perhaps because its problems are relatively minor, "fixing" Social Security is seen by many as a needed symbolic act that shows the government can act and is not broken.

Among the leading suggestions for changing Social Security are raising the retirement age and changing the formula used to calculate annual cost-of-living adjustments. Make these logical changes, proponents say, and most of the program's future budget gaps can be closed. No muss, no fuss; no harm, no foul.

[See Raising the Retirement Age: A Reflection of Our Evolving Economy.]

Except these changes aren't cosmetic or minor. They are significant. They would take lots of real money out of the pockets of our older and often most vulnerable citizens. They would, in other words, inflict serious hardships on decent Americans who deserve better. Implementing some of these changes over 10 or 20 years might spare current retirees from jolting adjustments. But it also amounts to piling more of the fiscal burden on younger generations.

Raising the retirement age to qualify for Social Security will, of course, eventually delay benefits. It also can't be done without reducing benefits for early retirees, shifting the age of early retirement, or both.

Right now, you can get your full Social Security retirement benefit at age 66. You can take early retirement and receive a lower benefit as early as 62. To give people this choice, Social Security benefits are set so that about the same amount of money is paid out by the program over the remaining lives of both the person who takes early retirement and the person who waits until age 66. This actuarial "neutrality" is fundamental to the program. The full retirement age is already slated to rise over time to 67. If you raise it yet higher, to 68 or even 70, you'd have to either reduce the benefit given to early retirees when they turn 62, or shift the date of early retirement to match the increase of the full retirement date.

Longevity gains have been impressive for the average American. For this average person, continuing to work a few more years is not physically taxing. For this person, a later retirement age seems like a natural reflection of improved mortality tables.

But this average is misleading. Many early retirees make this decision because their bodies are beat up well before they turn 62. They hold physically demanding jobs that often don't pay that much. They have not enjoyed longevity gains in recent decades and, in fact, have lost some ground in how long they are likely to live. Raising the retirement age for this group would be an enormous blow to them. So would reducing their early retirement benefits.

[See 10 Top Cities for Senior Living.]

Next, we come to the cost of living adjustment, or COLA. It is now set by looking each fall at the past 12-month increase in the consumer price index for urban wage earners. It's been suggested that the current COLA index actually overstates the amount of money that people pay for goods and services when prices rise. That's because people often substitute cheaper products when their preferred brand gets more expensive. Replacing the current index with this "chained" index of consumer prices is thus presented as a "fair' change that won't penalize anyone but will save a lot of money. All by itself, using the chained CPI to set the COLA would close more than a quarter of the entire Social Security self-sufficiency gap.

The catch, of course, is that it's not clear if the chained CPI is a proper measure of what seniors spend. In fact, it could further penalize older people who already are losing purchasing power under current COLA rules.

The CPI for urban wage earners is missing two big things when it comes to the spending habits of older Americans. First, it doesn't even try to track the special spending habits of retired Americans, particularly their healthcare spending. Second, it fails to reflect the rising share of senior spending devoted to healthcare as people get older. The impact of these omissions has been magnified by healthcare inflation that has been nearly double the rate of overall consumer price increases in recent years. Even modest annual differences compound over time.

Senior advocates thus suggest that instead of making things even worse with a chained CPI, it's time to finally develop and use an index that accurately tracks inflation trends for the market basket of goods and services that seniors buy. The catch, of course, is that it would further raise Social Security spending projections, not lower them. And that's not a discussion Congress is likely to have.

Twitter: @PhilMoeller