Congress is looking to change the way Social Security benefit payments are calculated because the coming cost of living adjustment (COLA) will be the highest in decades.
Experts see at least a 6.1 percent increase in benefits starting January 1, 2022. But even that increase may fall far short of the actual increase in cost seniors pay for things like healthcare and food. So Congress is examing a change in how Social Security benefits are calculated that would better reflect what senior citizens are paying for goods and services.
The Fair COLA for Seniors Act of 2021, proposed by Rep. John Garamendi, D-Calif., calls for changing the measure to the Consumer Price Index for the Elderly, or the CPI-E, rather than the CPI-W that is currently used.
The CPI-E may better reflect the expenses seniors face, because it is based on items that people age 62 and older tend to use, including a higher weighting for health-care costs, according to Richard Johnson, director of the program on retirement policy at the Urban Institute.
The change would actually make very little difference for today’s senior citizens but may prove to be significant down the road.
Switching to the CPI-E would result in an additional increase of about 0.2 percentage points per year over the current index, according to the Urban Institute’s Johnson. “Over time, that has a big impact,” he said.
Estimates indicate that after 25 years, cost-of-living adjustments using the CPI-E would push benefits 5% higher.
However, today’s retirees might not see much of a difference because it takes years to accumulate, Johnson said. But making the change still makes sense, he said.
Republicans will argue that the Social Security system is already on shaky ground and that adding costs at this point would only hasten the day of reckoning when the Social Security Trust Fund runs out of money.
“It would worsen the trust funds’ financial position, which is already quite precarious,” Urban Institute’s Mary Johnson said. “It seems like this type of change could become part of a larger Social Security reform effort.”
The problem is that Social Security has been paying out more than it collects from payroll taxes for a decade. To meet its obligations, the program funds benefits from assets held by the Old-Age and Survivors Insurance Trust Fund (OASI) and the Disability Insurance Trust Fund (DI)—but those funds can only last for so long.
“CBO projected that the OASI trust fund would be exhausted in calendar year 2032 and the DI trust fund in calendar year 2035—again, if current laws remained in place,” notes the CBO. “If the funds’ balances were combined, the resulting Old-Age, Survivors, and Disability Insurance (OASDI) trust funds would be exhausted in calendar year 2032.”
That’s 11 years from now, and inflation will only make the doomsday clock tick faster. Fiddling with the COLA to give seniors a few extra dollars today won’t stem the tide of red ink that’s coming.
“At the time of depletion of these combined reserves, continuing income to the combined trust funds would be sufficient to pay 79 percent of scheduled benefits,” the Social Security Administration admitted in its 2020 annual report. The inability to meet obligations would only worsen from there with a growing gap between revenues and expenditures.
The solution? Cut Social Security benefits, of course.
Benefit cuts, then, may become necessary to keep Social Security going, says the CBO. To keep the program solvent for 75 years, reductions of 30 percent starting in 2022 would have to be made to the benefits of all current and future beneficiaries. “These reductions would achieve a 75-year OASDI actuarial balance of zero but would not be large enough to prevent exhaustion of the combined trust funds during the period,” adds the CBO.
Waiting longer to address the problem would make the pain worse.
Like every other federal entitlement, Social Security is impossible to get rid of and will only be reformed when it is already circling the drain.