Social Security is, without a doubt, the most valuable social resource in our nation. For more than 80 years, it has provided a financial foundation for retired workers. Today she is responsible for lifting more than 15 million retirees out of poverty each year. Without this vital program, the poverty rate of older adults in the United States would be more than four times higher than it is today, according to an analysis by the Center for Budget and Policy Priorities.
However, it is also a program that faces its greatest challenge in history.
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The problems are worse for Social Security
Each year, the Social Security Board of Trustees publishes a report detailing the short-term (10-year) and long-term (75-year) prospects for the program. Since 1985, the Trustees have warned that long-term income generation would be insufficient to cover expected disbursements. This unfunded obligation figure has skyrocketed to $ 16.8 trillion as of 2020.
How does America’s most important social program go from being seen as infallible to a projected cash deficit of nearly $ 17 trillion? Look no further than a handful of ongoing demographic changes. In addition to the retirement of baby boomers, we are talking about rising income inequality, reduced net legal immigration, and a record low of birth rates as net negatives to Social Security.
If the current course continues, the 2020 Trustees’ report predicts that the program’s $ 2.9 trillion in asset reserves (that is, net cash surplus accumulated since inception) will be depleted by 2035. Once these reserves are assets are history, benefit cuts of up to 24% can wait for retired workers.
Suffice it to say that there is a very real fear among current and future retirees that cuts to Social Security benefits are looming.
But what if I told you that these benefit cuts are already here, and you just weren’t paying enough attention to have noticed?
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The IPC-W has been reducing the real incomes of older people for decades.
As an example, take a closer look at how Social Security inflation fixation, the Consumer Price Index for Urban Workers and Office Employees (CPI-W), has influenced the purchasing power of Security dollars. Social of the elderly in the last 20 years.
Since 1975, the IPC-W has measured price changes for a predetermined basket of goods and services. The Social Security Administration can then compare the average reading of the IPC-W for the third quarter (July to September) of the current year with the average reading of the IPC-W for the third quarter of the previous year. If the average has increased from one year to the next, it means inflation. And when there is inflation, it means that Social Security beneficiaries will receive a cost of living adjustment (COLA) in the coming year.
This may sound like a perfect system for measuring inflation faced by the 64 million Social Security beneficiaries, but it is very flawed. This is because, as indicated by the official name of the CPI-W, it tracks the spending habits of urban and administrative workers, none of whom is usually an older person or a Social Security beneficiary. Essentially, this means that the Social Security COLA determinant is tied to a group of people who do not represent the majority of the beneficiaries.
In plain English, the IPC-W does not provide accurate inflation readings for the costs that older people face. Major expenses (relative to retired workers’ budgets) like healthcare and housing are underweight. Meanwhile, lower costs for older people, such as education, clothing, and transportation, carry more weight.
The result, according to The Senior Citizens League, is a loss of 30% of the purchasing power of Social Security income since 2000.
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But wait, there is more
But an inadequate COLA is not the only way to reduce Social Security benefits.
Another culprit in the past decade has been persistently low levels of inflation. On the one hand, low levels of inflation would seem to favor consumers, and to some extent this is true. But there are two ways that a low inflation environment can harm Social Security payments.
First, low levels of inflation remove the incentive for companies to give their employees substantial increases. This leads to stagnant or slow growing wages. Since the Social Security Administration takes into account workers’ 35 highest inflation-adjusted earnings years when calculating their monthly benefit at full retirement age, an extended period of stagnant wage growth could certainly affect initial benefits or decrease lifetime benefits received.
Second, a low inflation environment will result in a smaller COLA being transferred to current beneficiaries. During the last decade, the average Social Security COLA is a meager 1.4%, which includes three years in which there was no COLA due to deflation (2010, 2011 and 2016).
But the fact that broader levels of inflation have dropped does not mean that the costs facing older people are moderate. In most years during the past decade, healthcare inflation has easily exceeded the COLA awarded to Social Security beneficiaries. As a result, the purchasing power of profits has been further eroded.
Social Security benefits cuts? I hate to tell you, but they’re already here.
