Washington is abuzz with reform at the moment. President Trump and members of the Republican House and Senate are taking on the arduous task of trying to repeal and replace the Affordable Care Act, the hallmark legislation of former President Barack Obama, as well as completely reforming the individual and corporate tax code. It's no easy task, and it's taking up a lot of time for lawmakers on Capitol Hill.
However, there's a far bigger problem on the minds of our nation's seniors: What's going to happen with Social Security?
Social Security has issues, and Congress has yet to offer a solution
According to the Social Security Board of Trustees, the program that a majority of seniors lean on to supply at least half of their monthly retirement income is expected to completely exhaust its more than $2.8 trillion in spare cash by the year 2034. As baby boomers continue exiting the workforce and the worker-to-beneficiary ratio falls, a greater strain is expected to be placed on Social Security. Should this spare cash run out, the trustees estimate that a benefits cut of up to 21% may be needed on an across-the-board basis for payouts to continue uninterrupted until 2090. The prospect of a 21% cut in benefits isn't something current or future retirees had planned for.
Seniors are counting on Congress to fix Social Security, but they have, thus far, been sorely disappointed by the lack of progress.
Interestingly enough, a lack of solutions hasn't been the issue. There are well over a dozen proposals that would help alleviate Social Security's expected $11.4 trillion budgetary shortfall over the next 75 years. The issue is that the primary method of fixing Social Security -- raising the retirement age, favored by Republicans, or increasing the payroll tax on the wealthy, proposed by Democrats -- needs to be acceptable to both parties. With both Social Security packages offering a workable solution, neither party has been willing to back down or meet in the middle.
This recently introduced bill is a pretty big surprise
Recently, however, a bill was introduced in the House that could wind up completely revolutionizing what sort of "raise" Social Security beneficiaries receive on an annual basis. The intriguing aspect is that it was introduced by John Duncan, a Republican from Tennessee.
Duncan's bill (H.R. 2016), dubbed the CPI for Seniors Act of 2017, would replace the current measure of Social Security's cost-of-living adjustment (COLA), the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) with a new measure known as the Consumer Price Index of Seniors (CPI-S).
The CPI-W has done a decent job of monitoring the price inflation that some Social Security beneficiaries face each year, but some critics have suggested that it has its shortcomings, and that as a results seniors are not getting enough of a COLA from one year to the next to keep up with their rising expenses.
Because it is designed to reflect the inflation working Americans face, the CPI-W drastically understates the medical expenses that seniors pay, and it also tends to understate how much they pay in housing costs. Comparatively, the CPI-W overstates expenditures for education, transportation, food, and apparel relative to what seniors actually spend according to the Consumer Price Index for the Elderly (CPI-E) -- yes, another inflation index.
Tying COLA to the CPI-E has been previously suggested by a number of lawmakers in Congress (mostly Democrats), but even this specialized index has its shortcomings. The CPI-E, which only factors in the spending habits of households with persons who are ages 62 and up, more accurately reflects some of seniors' medical care costs, but it doesn't account for the often high costs seniors pay for Medicare Part A (hospital insurance). Not factoring in certain Medicare costs throws any hope of COLA accuracy out the window.
Duncan's bill looks to change that by creating an inflationary measure that would more accurately reflect the medical Medicare premium increases faced by seniors, as well as related healthcare costs that aren't adequately factored into the CPI-W now. In essence, Duncan's CPI-S measure would be designed to replace the CPI-W and give seniors a more accurate COLA each year, likely resulting in a bigger annual "raise."
The use of this index comes as a surprise because Republican lawmakers are normally fixated on switching to the Chained CPI (yeah...another inflationary measure). The Chained CPI takes into account a process known as substitution, whereby if a good or service becomes too pricey, it's assumed that the consumer will substitute that product for a different, cheaper one. The CPI-W doesn't take substitution into account, therefore the Chained CPI would result in smaller COLAs from one year to the next than the CPI-W. With the CPI-S likely providing the largest COLA of any of the aforementioned three measures (CPI-W, CPI-E, and CPI-S), Duncan's stance is certainly an anomaly within his party.
Would the CPI-S actually work?
The important question, though, is: Would it work?
On one hand, Duncan's proposal to create a more accurate measure of the inflation that seniors face is a step in the right direction. Medical care inflation has outpaced Social Security's COLA in 33 of the past 35 years, meaning seniors are spending more and more of their income on healthcare expenses. More accurately aligning Social Security's COLA with medical care inflation would be a big step for the program, and it could lessen some financial stress on senior citizens.
Unfortunately, there's a downside to the CPI-S. Using the more accurate inflationary measure would mean larger payouts to seniors each and every month. And, in case you've forgotten, Social Security is already facing an $11.4 trillion budgetary shortfall and the complete depletion of its spare cash by 2034. Switching to a more accurate inflationary measure without increasing revenue (most likely via a payroll tax hike on the wealthy, or across the board) would put Social Security in an even greater fiscal bind. Because of this risk, the future of the CPI for Seniors Act of 2017 is very much in doubt.
Social Security clearly needs a nudge in the right direction, and the CPI-S would probably be a nice refinement to the current program, but there are far bigger issues to be dealt with first.