Presumptive Democratic presidential nominee Joe Biden has big plans for Social Security. In his recently released economic plan, one of his proposals would change the way Social Security's periodic raises are calculated. Here's what it could mean for retiree' income.
How a President Biden would change Social Security raises
Biden's economic plan describes a number of changes to Social Security, but one of the first that's listed is to provide a "benefit plus-up" by "adopting CPI-E for Social Security indexing."
If you aren't familiar with the intricacies of Social Security lingo, that might sound like a lot of nonsense. But it's actually an important change to the way cost of living adjustments (COLAs) are determined.
To make sure retirees don't lose buying power, Social Security offers periodic COLAs, better known as benefit increases or raises. They don't happen every year, though. The key determining factor in whether seniors will get an increase is based on how much prices rise, as measured by the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). Biden wants to switch the pricing index used to determine COLAs to an experimental price index for the elderly called CPI-E.
At first glance, that seems like an obvious change. Why not measure price increases borne by senior retirees with an index that tracks costs of things elderly people tend to spend money on, rather than one that measures rising prices for urban wage earners and clerical workers? Especially since, as the chart below shows, CPI-E does weigh things seniors tend to spend more heavily on, including housing and medical care, while giving less weight to education and apparel (not a major source of expenditures for most seniors).
But making the shift to CPI-E from CPI-W is controversial because it would mean retirees generally receive larger COLAs, thus raising their benefits and increasing the cost of Social Security. One analysis from the Government Accountability Office, for example, found that if CPI-E were used over a 30-year period instead of CPI-W, a retiree who had earned the national average wage would see $100 more in monthly checks.
While this would help reduce or even eliminate the decline in buying power that Social Security benefits have experienced over the last two decades, it would also force other changes to improve the program's funding, since an increase in benefits without a corresponding increase in revenue would only exacerbate the program's existing financial shortfalls. These other changes, such as raising payroll taxes or subjecting more income to Social Security taxes, aren't very popular with lawmakers on the right.
Consider Social Security when casting your vote
There are many issues at the forefront in selecting the next president, and Social Security is one of them. The next president could be forced to take action to shore up this entitlement program since it's quickly running out of money and coronavirus has likely accelerated that process. So read up on each candidate's proposals to decide whose position best fits your views.