Presidential candidate and Vermont Senator Bernie Sanders (I-Vt.) once referred to Social Security as "the most successful government program in our nation's history." And the reality is he's 100% correct.
Social Security has been providing a financial foundation for retired workers for nearly 80 years. According to an analysis from the Center on Budget and Policy Priorities (CBPP), it's responsible for keeping in excess of 22 million beneficiaries out of poverty each month, including 15.3 million retired workers. If Social Security didn't exist, the elderly poverty rate in this country would spike from a present-day 9% to more than 40%, by the CBPP's estimate.
Social Security is a little over 15 years away from big problems
But as you're also probably aware, it's a social program that's seen better days. A slew of ongoing demographic changes have weakened Social Security's long-term outlook. In fact, the latest Board of Trustees report projects that big changes are brewing in 2020.
The newest report suggests that, for the first time in 38 years, Social Security will expend more than it collects in revenue next year. This accounts for the benefits it pays, which comprise about 99% of the program's outlays, as well as general and administrative expenses for the agency, and transfers to the Railroad Retirement exchange. With each passing year after 2020, this net-cash outflow is only expected to grow in size.
The frightening prognostication offered by the Trustees is that Social Security will have completely exhausted its asset reserves -- i.e., the net-cash surpluses built up since its inception – by 2035. If and when this excess capital disappears, retired workers and future generations of retirees could be facing an across-the-board benefit reduction of up to 23%. While there is a silver lining in that Social Security won't go bankrupt, there's still not much solace for the 62% of current retirees leaning on the program for at least half of their monthly income.
The big question is: How do we resolve this dilemma?
Here's how the GOP could remove $174 a month from retirees' paychecks without a direct "cut"
On Capitol Hill, both political parties have acknowledged that Social Security needs some TLC. Unfortunately, neither party is in the same ballpark as to how best to fix what's estimated to be a $13.9 trillion shortfall over the next 75 years.
What isn't in doubt, though, is that if Republicans were able to implement their two most prominent solutions, every beneficiary would see some form of reduction in their payout.
The GOP has long favored cost-cutting as the best means of reducing Social Security's shortfall. The most commonly touted method of tackling this would be by gradually raising the full retirement age -- i.e., the age at which you become eligible for 100% of your monthly payout. Currently set to peak at age 67 in 2022 for those born in 1960 or later, Republicans would like to see this figure gradually increased to age 70. Such a move would require future generations of retirees to either wait longer to collect their full payout or to accept a steeper up-front reduction by claiming early. No matter their choice, lifetime benefits, and therefore program outlays, would be reduced.
But the thing about raising the full retirement age is that it takes a long time to work. Meanwhile, the other Republican proposal -- changing Social Security's inflationary tether from the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) to the Chained CPI -- could yield modestly faster savings.
The Chained CPI is an inflationary measure that takes into account the idea of substitution bias. If, for instance, you're walking down the supermarket meat aisle and see that ground beef prices have risen 50% recently, you may opt to trade down to a cheaper meat, such as chicken or pork. This is substitution bias in action. No other inflationary measures take this trade-down into account, save for the Chained CPI. As a result, the Chained CPI tends to report inflationary figures lower than the CPI-W more years than not.
For Social Security beneficiaries, replacing the CPI-W with the Chained CPI would mean a smaller annual cost-of-living adjustment (COLA). According to a hypothetical analysis conducted by The Senior Citizens League, if the Chained CPI had been Social Security's inflationary measure, average monthly retired worker benefits would be $174 a month lower 30 years later, relative to the CPI-W. Though these changes may not be noticeable in the first year or three, they'll eventually be felt via an increased loss in purchasing power.
Don't count on a switch to the Chained CPI anytime soon
Now, before you start worrying about a reduction in your current or future Social Security benefit check, let me caution that a switch to the Chained CPI from the CPI-W appears highly unlikely anytime soon.
For one, President Trump has been pretty adamant about not making direct changes to the Social Security program. Trump has argued that indirect solutions that boost economic growth, thereby leading to an increase in payroll tax collection, should be more than enough to improve the health of the program.
More important, there would need to be bipartisan cooperation in Washington in order to pass such a measure; and none exists right now. Any amendment to the Social Security program requires 60 votes in the Senate, and it's been four decades since either party had a supermajority in the upper House of Congress. There's virtually no way Democrats would support switching to the Chained CPI when they have their own inflationary tether change proposal on the table.
What retired workers can worry about is the persistent loss of purchasing power caused by the CPI-W. Even though the CPI-W offers considerably higher COLAs over the long run, relative to the Chained CPI, it's an inflationary measure that's tracking the spending habits of traditionally working-age urban and clerical workers. In effect, the CPI-W virtually ignores the spending habits of its largest beneficiary base (retired workers) in favor of younger urban and clerical workers. This results in important expenses, such as housing and medical care, being underweighted, while other less-important costs, like education and apparel, have added weight in the COLA calculation.
Since 2000, the purchasing power of Social Security income has fallen by 33%, and it doesn't look as if this trend will slow anytime soon.