Few programs bear the burden of importance that Social Security does. Each and every month, more than 62 million people receive a benefit check, and approximately 7 out of 10 of these individuals are aged beneficiaries. Of these aged Americans, 62% lean on Social Security to provide at least half of their income during retirement.
But it's also a program with no shortage of issues.
According to the newest annual report from the Social Security Board of Trustees, the program will begin paying out more in benefits than it generates in revenue this year. This net cash outflow will accelerate with each passing year with the exception of 2019, resulting in the complete exhaustion of its $2.9 trillion in asset reserves by 2034. Should this excess cash be depleted, and assuming Congress enacts no new laws to raise revenue or cut expenditures, an across-the-board cut in benefits of up to 21% may be needed.
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Social Security's pressing inflation issue
Perhaps an even more pressing issue for Social Security and seniors in the near and intermediate future is its inflation issue. Here's how things should work on paper: The Social Security Administration (SSA) uses an index to track the inflation that all of its beneficiaries are contending with. At the end of the year, it passes along a cost-of-living adjustment (COLA) to Social Security recipients that adequately matches this inflation rate. In this perfect scenario, benefits keep pace with the rising cost of goods and services.
But herein lies the problem: The program has a diverse subset of beneficiaries, in terms of age. This means the spending habits of its eligible beneficiaries could differ considerably, and there's no such thing as a one-size-fits-all solution.
Right now, the program tethers itself to the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). While this is an inflationary index that measures eight major spending categories, along with dozens upon dozens of subcategories as its name suggests, it focuses on the spending habits of urban and clerical workers. Working-age urban and clerical workers don't have the same spending profile as retired workers, who make up around 70% of all Social Security beneficiaries.
So what does this mean for seniors? The simple answer is that they're getting the short end of the stick when it comes to their annual COLA. For instance, housing and medical-care costs tend to be notably higher as a percentage of total expenditures for seniors compared to working-age urban and clerical workers. This means these important expenditures are being underrepresented in the CPI-W formula.
Meanwhile, apparel, food, and transportation tend to be higher for working-age Americans relative to seniors. Thus, these less important expenditures, which have had lower inflation rates over the past couple of decades, have received more representation.
Based on an analysis from The Senior Citizens League (TSCL), the purchasing power of Social Security income has dropped by 34% since 2000. Put another way, what $100 in Social Security income purchased 18 years ago now only buys $66 worth of the same goods and services.
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The big worry: Republicans are going to shift Social Security's inflationary tether
This inflationary faux pas has most seniors requesting reform. After all, since aged beneficiaries represent the majority of Social Security recipients, it's almost mind-boggling that an inflationary measure isn't currently in use to specifically track the expenditures of households with persons aged 62 and over.
While such a switch has regularly been proposed by Democrats (known as the Consumer Price Index for the Elderly, or CPI-E), that's not the type of solution Republicans have in mind. What seniors and future generations of retirees have to be worried about is the possibility that the CPI-W will be replaced by the Chained CPI.
What the heck is the Chained CPI, you ask? It's pretty much the same as the CPI-W with regard to spending categories, but with one critical difference: The Chained-CPI takes into account substitution bias.
Imagine you're walking down the meat aisle at your local supermarket and notice that ground beef prices have risen by 30% over the past six months. Rather than buy beef, you decide to purchase pork and chicken instead. You've made a conscious choice to trade down to a similar item because one good has become too expensive. That's substitution bias.
Here's the issue: Even though substitution bias describes the very real act of trading down from one good to another because of price, none of the other inflationary indexes account for this. Therefore, while Republicans would argue that the Chained CPI most accurately reflects the spending habits of consumers, it would also produce smaller annual inflationary increases relative to the CPI-W.
Simple translation: Annual COLAs would be smaller.
In fact, a TSCL report made the hypothetical assumption that the GOP implemented the Chained CPI in place of the CPI-W in 2017, and found that benefits would be reduced by $174 a month, or almost $2,100 a year, at the end of a typical 30-year period relative to the CPI-W.
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The sneaky way the GOP could reduce Social Security benefits
Why would Republicans want to knowingly shrink Social Security's annual cost-of-living adjustments by switching to the Chained CPI? For starters, Social Security is in trouble.
The Trustees report data notes that the program is starting to burn through its asset reserves. Utilizing the Chained CPI instead of the CPI-W would cause benefits to grow at a slower pace, thus saving the program money over the long run. Remember, Social Security's future can be secured by raising revenue and/or cutting expenditures. This would be an example of the latter.
The other reason is because Republicans tethered federal income tax brackets, the standard deduction, and other credits to the Chained CPI when the Tax Cuts and Jobs Act was passed by Congress and signed into law by President Trump in December. If this inflationary measure is already being used to slow the rate of inflationary growth in the ordinary income tax brackets and for deductions and credits, it becomes that much more likely that the GOP would make an attempt to use the Chained CPI as Social Security's preferred inflationary measure.
All in all, it would be a pretty sneaky way of reducing benefits over the long term and saving the program a lot of money without passing broad-sweeping legislation.
Of course, the chances of swapping out the CPI-W for the Chained CPI aren't as high as you might think, even with a Republican-led Congress. With this being an election year, Republican lawmakers are unlikely to work on any legislation that would ultimately reduce Social Security benefits, for fear of losing their elected seats.
Furthermore, President Trump hasn't exactly been on board with the idea of altering Social Security. Trump previously suggested at the Conservative Political Action Conference in March 2013 that altering Social Security during an election year is political suicide (without using those exact words). Rather, the president has favored pushing economic growth policies to increase wages and income, which would therefore grow payroll tax revenue and purportedly strengthen the program.
Ultimately, switching Social Security to the Chained CPI is far from a sure thing -- but there's no denying that it's considerably more likely now than it was at this time last year.
