Is Obama About to Cut Social Security?

Last week President Barack Obama finally produced his 2014 budget proposal (which actually covers the period from October 2013 until September 2014). One of his key concessions to deficit-conscious Republicans is a switch to the "chained CPI" method of calculating inflation. This proposal has been on the table for more than a month, and liberal Democrats have slammed it as a cut to workers' hard-earned Social Security benefits. However, a switch to chained CPI will not in fact cut Social Security benefits; it will just make future cost-of-living adjustments smaller. In other words, Social Security benefits will not be quite as generous in the future as they are today.

While Social Security is not currently a driver of the federal deficit, under current law the program will run out of money in a few decades. At that point, the government would be forced to increase revenue or cut benefits. Obama's proposal therefore seems like a sensible way to improve the solvency of the Social Security program. Nevertheless, it will have a significant impact on current and future retirees. In the future, it will be more important than ever for Americans to have well-funded retirement accounts. Improving your financial literacy now can help you invest appropriately (considering your retirement goals) so that changes to Social Security will be a mere inconvenience, rather than a major problem.

The outcry
The current political climate in the U.S. is strongly anti-deficit. Increasingly, people are blaming the country's deficit problem on entitlement spending, although, as I wrote last month, defense spending has played a big part as well. While the extent of the problem is sometimes overstated, Social Security and Medicare reforms are still necessary.  Based on recent projections, neither system will remain solvent for more than 20 years or so. The longer we wait to make changes, the more drastic they will need to be.

If Social Security reform needs to occur, there are two main possibilities: revenue increases or benefit reductions. Many Democrats are lobbying for removing the cap on Social Security taxes; in 2013, Social Security taxes only apply to the first $113,700 of income. Some people are even advocating for higher payroll tax rates. However, an increase in Social Security taxes is highly unrealistic in the current political climate.

Moreover, removing the cap on Social Security would not be in keeping with the program's goal of providing social insurance. Generally speaking, everybody pays into Social Security, and everybody is entitled to benefits in return -- though there are some exceptions in practice. People who pay more into the system are entitled to higher benefits, but only up to a limit. Forcing the wealthy to pay more into Social Security without getting more out of the system is a political non-starter -- but it's also simply unfair. Wealthy people arguably get more benefits from government and can reasonably be asked to pay higher income taxes; the same does not apply to Social Security, because there is a cap on benefits.

The reality
There's no easy way out for America. The Social Security system is in much better financial shape than Medicare, but analysts estimate that it would need to cut benefits by 24% in two decades to cover its deficits. Raising payroll taxes could theoretically close this gap, but that would force taxpayers to cut back on other expenses (including individual retirement savings). The reality is that today's senior citizens are receiving an unsustainably high level of benefits relative to the taxes they paid into the system. Reducing cost-of-living increases will certainly hurt people who are dependent on Social Security today, but failing to reform the system will hurt future generations even more.

What it means for you
Fears that Social Security will disappear are overblown. While the system is not quite solvent today, relatively minor changes such as moving to the chained CPI and/or raising the retirement age by a year or two could make it sustainable. On the other hand, Social Security reform will almost certainly mean that future retirees will receive less valuable benefits than they would under the current system.

Today, the maximum starting benefit for somebody who begins taking benefits at full retirement age (66) is about $2,500 per month. That's already a fairly tight budget, especially if you have significant medical expenses that are not covered by Medicare. Furthermore, most people receive significantly less than the maximum benefit. Lastly, under Obama's proposal, cost-of-living increases will be smaller in the future. As a result, it's critical to save money on your own for retirement and to invest that money wisely.

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Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On April 16, 2013, at 8:02 PM, docwood43 wrote:

    Why is it, when the problems with social security are discussed, we never seem to get around to the $$$$ owed to the SS trust fund by the federal government. The last figure I saw was somewhere around 1.2 trillion dollars that had been "siphoned" (political terminology for stolen) off by the feds and replaced with federal reserve notes (IOU's). Actually, this dollar figure includes interest on the money spent for federal programs other than SS. Just curious as to why we cannot get the federal government to own up to the real reason why SS is in the condition it is in today.????

  • Report this Comment On April 16, 2013, at 8:14 PM, CommonSense1776 wrote:

    The problem isn't just the government embezzeling money from Social Security. The problem is that it is set up like a ponzi scheme. We are not investing in ourselves, we are paying for the ones who are on SS with our contributions. There will be a tipping point where there will be more people on SS than contributing. Eventually, excess funds will run out and it will be insolvent. By "cutting" Social Security, he is only delaying the inevitable.

  • Report this Comment On April 16, 2013, at 8:17 PM, adam6669 wrote:

    Calling Obama's plan for Social Security anything BUT a cut, is at the very least, disengenuous. More likely it is blatant lies. Obama isn't giving in. He gladly OFFERED it!

  • Report this Comment On April 16, 2013, at 8:26 PM, sandyclaws99 wrote:

    Actually call it a "cut"is a blatant lie, because a cut reduces something. What this does is use a more meaningful index to calculate yearly increases. I collect Social Security, and I welcome the President leading the way to fiscal sanity

  • Report this Comment On April 16, 2013, at 8:27 PM, HerosPlay wrote:

    The simplest answer to addressing the proposed Social Security problem is to increase the income limit for the Payroll Tax.

    The tax is currently unfair to lower incomes while limiting the amount of participation by the upper incomes. Three point five percent of a person's income whose makes 20.0K per year has a greater effect on their household than the less than a half of a percent of a millionaire's income has on their lifestyle..

  • Report this Comment On April 16, 2013, at 8:34 PM, Chris1016 wrote:

    If the government can call lower increases in spending a tax cut, then lower increases in Social Security is a cut in benefits. The latter half of the baby boomers and all younger Americans are getting a raw deal. Like any ponzi scheme the only winners are the ones who started it.

  • Report this Comment On April 16, 2013, at 8:36 PM, ragatag wrote:

    do you know that obamas want to cut ss is fine with me as long as all federal employees pay for thier own insurance with them doing this they would cut the 17 trillion debt down to nothing tks for letting me4 make a comm3ent

  • Report this Comment On April 16, 2013, at 8:42 PM, tkell31 wrote:

    Before they cut SS they should cut federal pensions and start with the politicians. At least people on SS paid into the system.

  • Report this Comment On April 16, 2013, at 8:49 PM, TMFGemHunter wrote:

    It's true that people who have already collected benefits for a long time have done better than other people will in the future. But there's no use crying over spilled milk. The real question is what should we do now. Also, I am assuming that the government will reimburse the Social Security Trust Fund; otherwise, the program would be insolvent within the next year or two. The problem is that even with the approximately $2.7 trillion in the trust fund, Social Security will run out of money two decades from now unless something is changed.

    As for fairness: I think there are reasonable arguments to be made that wealthier Americans should pay higher taxes. However, I don't think it's reasonable to raise the cap on FICA taxes (at least, not by a significant amount). Social Security is essentially a forced retirement saving program. Lower-income individuals already get a MUCH higher investment return from the system than high-income individuals.

    I know it feels like a tax when the money gets pulled from your paycheck, but it's important to be saving money for retirement anyway. The introduction of Social Security back in the 1930s had a tremendous effect in terms of reducing poverty amongst the elderly. Today, I think we tend to forget what the country would look like without the Social Security system.

    Adam

  • Report this Comment On April 16, 2013, at 9:02 PM, wolflady53 wrote:

    well if congress did not get such high pay for basicly doing nothing excepct to try and out do one side or the other we would have more money to take care of these things and not have to hurt people who live on socail security or who have or are paying all there lives

  • Report this Comment On April 16, 2013, at 9:12 PM, totalidiots wrote:

    well that means the govt. stole the money and replaced it with IOU'S................ thieves so we don't need to pay into the system any longer .

    our leaders/ politicians are leading us down the same road that Hitler took Germany down copying his tactics to the letter.

    type 25 signs the USA of America is going down the same path that Nazi Germany did . they want to delete the elderly, since they can't get anymore money out of us and we are costing them to much money to care for....................................

  • Report this Comment On April 16, 2013, at 9:28 PM, ADF65 wrote:

    Ok--so I was just ready to rant and rave until I got to the end and realized that this is a JOKE article. It has to be. I hope that this site is much like 'The Onion' b/c I felt like almost everything I read was a lie. Then at the end when it wanted US to buy their stocks--I thought this is a GIANT ad; A marketing scheme for sure...and also full of lies. So...I won't make all the points that many made before me. Yet, I am upset that Obama is even considering CUTTING SS or Medicare. Really take from the poor to GIVE to the rich. Its NOT science here...its the wealthy stomping all over the rest of us. And not the Gov't...the Gov't is not quite working up to par--but they are not to fault. It's the corrupt politicians (taking $$ from Big Business) swirling us down the drain for their OWN greed. Sad really~

  • Report this Comment On April 16, 2013, at 9:36 PM, brennang1 wrote:

    Who is calling the existing COLA generous? This is the first year in 4 years where my grandfather got an increase in his social security payments.... For the last 3 years there has been no adjustment and this year the adjustment was 1.7%....That is so generous

  • Report this Comment On April 16, 2013, at 9:44 PM, fortazink wrote:

    If the then President Johnson had not taken that money and put into the general fund there wouldn't be all this mess. There was a 7 billion shift of funds . Now with the interest would have to be awesome. And social security would be there for everyone especially those who put their money with government and trusted them to do the right thing. Stop laughing.......

  • Report this Comment On April 16, 2013, at 9:54 PM, JJP53 wrote:

    Ok, so now after being out of work for almost two years, and having gone through all the money I had set aside, because no one wanted to hire people like me who are over 55 ( I'm 57 now ), I got a new job that hardly covers rent and food, and nothing left to set aside, when I do retire, if I don't die at work, all I will have to live on will be my SS, and the last time I checked I will get less than $900 a month. That won't even pay my rent here in socal. Just what does the gov. expect us to do if they cut what little SS some people get now?

  • Report this Comment On April 16, 2013, at 9:58 PM, TMFGemHunter wrote:

    @brennanq1: There were actually only two years without a cost of living adjustment. The previous year the COLA was 3.6%. http://www.ssa.gov/oact/cola/colaseries.html.

    I don't know if I'd call the COLA generous, but I think it's clear that the benefits are too generous, since they will sink the system by the time I would be retiring. 50 years ago (around the time that many current retirees were starting to work), average life expectancy in the U.S. was less than 70. Now life expectancy is almost 80. That's a lot of extra years for people to be collecting Social Security benefits that wasn't reflected in the amounts they paid into the system.

    I don't think it would be fair to cut the benefits of current retirees, but changing the inflation measure seems entirely reasonable.

    Adam

  • Report this Comment On April 16, 2013, at 10:08 PM, Govman51 wrote:

    You cant take it all out on the social security persons it has tro start at the top and work down, congress needs to take pay cuts and no more free insurance they can purchase their own.

    another thing stop the spending congress again approved all this for the last decade we went to a debt that could not be paid back. military needs to drop their budget, cut military forces and get out of afghan and iraq. if any country wants us there they pay for the protection.

    cutting cost to socia; security is not the answer cut the prices and control them thay are way too high and they dont want to hire people just make profits this will only add fuel to this bad issue. there are fixes but attacking the elderly and poor is not the answer.

    any more gov spending as to be looked at for debt ceiling and how they will return back with a plan these big corporations are making big profits at tax payer expense this needs to be controled and they need to do more for this country not just the poor and middle class we gave all we can and could.

    taxes for elderly needs to stop they did their part for this nation, its time for the rest to ste up and do something, liberal and conservative congress and president, all fed and state gov employees. we all wnat NAFTA done with it doesnt work! we wnat our good paying jobs back with benefits thats how you get out of debt and make this country great again.

  • Report this Comment On April 16, 2013, at 10:44 PM, djrichard wrote:

    Payroll taxes are simply there to keep politicians from screwing around with the payout. The payout could be completely funded through other taxes or deficit spending. See what FDR had to say about this ...

    http://www.ssa.gov/history/Gulick.html

    [Gulick] suggested that it had been a mistake to levy these taxes in the 1930’s when the social security program was originally adopted. FDR said, “I guess you’re right on the economics. They are politics all the way through. We put those pay roll contributions there so as to give the contributors a legal, moral, and political right to collect their pensions and their unemployment benefits. With those taxes in there, no damn politician can ever scrap my social security program. Those taxes aren’t a matter of economics, they’re straight politics.”

    FDR also mentioned the psychological effect of contributions in destroying the “relief attitude.”

  • Report this Comment On April 16, 2013, at 11:06 PM, angelosdaughter wrote:

    Generous COLAS! Some years there are none even though the price of everything keeps going up, or what is granted is eaten up by a raise in the cost of Medicare Part B. What is so generous?

    My suggestion is to cut the salaries of the members of Congress. They are not supposed to be there to get rich. They are supposed to serve the people that elected them. They are not doing their jobs. If we normal workers performed our jobs the way they do, we would be fired.

  • Report this Comment On April 16, 2013, at 11:13 PM, Doesitmatter2u wrote:

    I would love the government to tie the social security increases to the inflation rate that they calculate (which excludes gas and various other things that actually increase over time). Then the government would have no incentive to decrease reported inflation because it would upset social security beneficiaries.

  • Report this Comment On April 16, 2013, at 11:21 PM, TMFGemHunter wrote:

    I understand that a lot of people want to cut congressional salaries. Maybe that's a good idea for symbolic purposes. But congressional salaries add up to around $100 million, against a total deficit of roughly $1 trillion. This is really a drop in the bucket.

    Also, we have to take some collective responsibility for congressional dysfunction. After all, we are the people who keep electing our Congressmen/women every two years.

    Adam

  • Report this Comment On April 16, 2013, at 11:25 PM, Makikijoe wrote:

    Who is the (probably wealthy) right winger who is behind this "The Motley Fool" organization website ?

    It seems to me that the main purpose of the Motley Fool news "stories" seems to be to bash President Obama and also bash the new health care law.

    Whoever is behind this Motley Fool attempt to create fear and division should know that we readers are not idiots. We can smell a troll when we read one.

    Motley Fool seems to have an agenda.

    The rather obvious agenda is to try to hurt the implementation of the new health care law.

    Each story about health care seems to be focused on raising fears, in the (rather futile) hope that the law will be repealed.

    But that is not going to happen. Not as long as the Democrats hold the Senate. In other words, not until at LEAST January 2015.

    Even then, it will be very hard to repeal it since Obama is bound to veto ANY bill to repeal.

    Can the Republicans get two-thirds of the Senate to override the veto. No, they can't.

    The new health care law was written with provisions to help employers by providing them with credits that will help them pay their share of the expenses of providing health insurance.

  • Report this Comment On April 17, 2013, at 12:55 AM, NOTvuffett wrote:

    If you are an employee, the current rate is 6.2%. Double that if you are self-employed.

    This point seems lost on most people, but if your employer has to spend that money just to employ you, that is less money they have to pay you. So it is a wash, but hidden, What could you do with that money? Could you make it grow faster than govt. idiots? I bet you could.

    SS was initially sold to the people as a sort of retirement/insurance plan. When it was challenged in the courts (all the way to the supreme court), the lawyers for the govt. argued that it is just a tax, and they were victorious.

    Isn't it curious that congress exempted themselves from this onerous tax burden? lol.

  • Report this Comment On April 17, 2013, at 2:19 AM, johnpetew wrote:

    I thought I was supposed to get a fixed and never changing retirement plan according to the government. Now, it looks like it was just a common ponzie scheme that looks good at first and then runs out of money as it expands. They took the investments by the baby boomers to pay off an old investor, and now my money is gone. My money was not saved for MY retirement. They are crooks.

  • Report this Comment On April 17, 2013, at 2:22 AM, johnpetew wrote:

    How about keeping any government program solvent, by not spending it just to look good and then asking for more money in the future. That is pure deception of the taxpayers.

  • Report this Comment On April 17, 2013, at 2:40 AM, NOTvuffett wrote:

    johnpetew, ask Al Gore where he put the "lock box", lol.

    lockbox: http://www.youtube.com/watch?v=D-ErdU8Ck8g

  • Report this Comment On April 17, 2013, at 9:17 AM, kickapookim wrote:

    If SS will not be avail to me (I am now 33) when I retire (since the above article says SS will not be avail in a few decades) then why am i paying into it now? Here's my sollution, I stop paying into SS and save that money for my retirement now!!

  • Report this Comment On April 17, 2013, at 10:57 AM, TMFGemHunter wrote:

    @kickapookim: SS is not going away, but at the current rate it would have to cut benefits by around 24% in a couple of decades. That's why making smaller adjustments makes sense; changing the inflation calculation and raising the retirement age by a year or two could make the system completely solvent again.

    This is not the first time Social Security has run into trouble. It's a natural result of the fact that we are living longer. In the 1980s the Social Security Trust Fund ran out of money, but the government was able to make some changes to the system to make it solvent again.

    Adam

  • Report this Comment On April 17, 2013, at 12:25 PM, mdk0611 wrote:

    Social Security is unfair to lower income workers? Horse excrement. The benefit formula skews slightly in favor of lower income recipients.

  • Report this Comment On April 17, 2013, at 4:31 PM, damilkman wrote:

    The problem is the intention of social security was a method to prevent people who were unable to work from starving because most work back then was hard manual labor. it was never intended to finance a second career, Today people expect social security to replace their job whether they can continue to work or not. Not only that they expect the best health care regardless of the ruinous lifestyle choices that they have made. Because the government forces hosipitals to accept their cost justifications(Mediplans) everyone else is forced to make up the difference.

    We are all responsible for the lifestyle choices we choose to make. I know people who do not make very much who have saved a lot and people who make a lot of money who claim their is no money in the budget to save.

    Social Security was never intended to be a replacement for a job. It is our responsibility to save for retirement. If I am unable to save enough to live the lifestyle I want when I am 62, I will keep on working.

    As a possible solution I have no problems with people collecting social security and who are working. A good compromise would be raise the amount of income they are allowed to keep while on SS. So if their age prevents them from a high paying job, they can supplement with a lower paying job that they are capable of.

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