Trying to get America's two major political parties to agree on anything these days is extremely difficult, but you'll have little trouble getting either side to admit that the Social Security program -- arguably one of the most important financial backstops for low-income retirees, the disabled, and survivors of deceased workers -- is in trouble and needs to be fixed.
The Social Security program needs help
There are two main reasons why America's most well-known entitlement program is on an unsustainable path. First, people are living longer than ever before. Per the Centers for Disease Control and Prevention, according to the latest data the average life expectancy is now nearly 79 years in the United States. Five decades ago the average life expectancy was just 70 years. As health education and medicine improve, seniors will be able to draw benefits from the Social Security program for a longer period of time, thus draining the Old-Age, Survivors and Disability Insurance Trust, or OASDI, even faster.
The bigger dilemma is that baby boomers are beginning to leave the workforce en masse for retirement. Despite new bodies entering the labor force, there simply aren't going to be enough workers to support the worker-to-beneficiary ratio at the 2.8-to-1 level it was at in 2014 according to the Social Security Administration. As this ratio falls, we'll eventually see a shift from a cash inflow to the OASDI to a cash outflow.
Based on the SSA's projections, the OASDI will burn through its remaining cash reserves by 2033, at which time a 23% benefits reduction would be needed to help offset the decline in revenue as a result of the fall in the worker-to-beneficiary ratio (unless Congress acts sooner).
But according to one member of Congress, senior citizens have already been given a benefits cut by missing out on $388 billion.
Did seniors really miss out on $388 billion in Social Security benefits?
Alan Grayson (D-Fl.), a representative of Florida's ninth congressional district, has claimed that the SSA's insistence on tying Social Security cost-of-living increases to the Consumer Price Index for workers, or CPI-W, as opposed to the Consumer Price Index for the elderly, or CPI-E, has led to retirees missing out on $388 billion in benefits since 1982. Per Grayson's calculations, the CPI-E would have led to an average increase in benefits of 0.2% per year more than the CPI-W since 1982.
Why the focus on the SSA's cost of living adjustment, or COLA? Grayson is honing in on one of the roughly one-dozen arguments proposed to fix Social Security, which is to tie the COLA in with an index that more closely represents the spending habits of senior citizens. While retirees don't make up the entirety of Social Security beneficiaries, they do comprise about 70% of all benefit recipients, thus their interests should arguably be the most represented in any COLA calculations.
As you can see above, data in December 2011 from the Bureau of Labor Statistics clearly demonstrates that expenditures for the elderly (those aged 62 and up) can be markedly different than the CPI-W or CPI-U (Consumer Price Index for all urban consumers). For seniors, 44.5% of expenditures went to housing, with another 11.3% funneled into medical care. By comparison, only 39.2% of expenditures went to housing under the CPI-W, and a mere 5.6% went to medical care. Instead, the CPI-W places a higher focus on transportation costs, food and beverages, education and communication, and apparel. This would appear to show that not only does the CPI-W not accurately reflect seniors' spending habits, but it discounts perhaps the highest inflationary item of all: medical care.
Does Grayson's solution make sense?
With these statistics in Grayson's sails, he plans to propose legislation to Congress when it reconvenes known as the "Seniors Deserve a Raise Act." This legislation would make the CPI-E a viable tool for the SSA to use in determining the upcoming year's COLA (although the higher of the CPI-W or CPI-E would be chosen on a year-to-year basis), and it would retroactively offset the shortfall that seniors have been denied since 1982. In other words, it would, presumably in a lump sum, pay out $388 billion in benefits to eligible Social Security beneficiaries as a "catch-up." But would it work?
On one hand, a very strong argument can be made that tying COLA to a measurement that's more in line with seniors' spending habits is going to more accurately benefit seniors over the long run. If seniors are receiving a bump up in payments that corresponds with increasing medical and housing costs, then presumably they could find themselves on more solid financial footing. Additionally, the lump sum payment isn't going to make retirees rich by any means, but it could give them added financial security.
Yet there's another side to this coin that makes Grayson's proposal less of a slam-dunk. To begin with, immediately paying $388 billion out of the OASDI to seniors because COLAs had been calculated with the CPI-W in the past could shave years off the SSA's projection of when the OASDI's cash reserves will be depleted. It's bad enough that seniors could face a 23% haircut by 2033 -- if Grayson's plan goes through without any additional reforms to Social Security, it's possible a benefits cut could come even sooner.
The CPI-E is also a less precise measure of inflation than its counterparts the CPI-W or CPI-U. Because there are far fewer households with Americans aged 62 and above than working-age individuals, more accurate inflation measurements are seen when using the broader scope CPI-W or CPI-U.
Also, Medicare Part A, also known as the hospital insurance coverage for the elderly, isn't included in the CPI-E, which is a bit worrisome since a lot of the medical transactions that seniors could deal with may relate to Medicare Part A expenses.
As it stands now, Congress and the president still have a lot of work left to do to make the OASDI sustainable over the long run.
Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.
The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.