This past April, President Obama proposed changes in Social Security benefits in an effort to lower the budget deficit. More specifically, these changes are aimed to address the shortfall in funding for Social Security benefits. This entry clarifies how Social Security benefits could be paid under these adjustments and how the changes will impact Americans—and your clients— in the future.
How Social Security is calculated now
Each year, the payment an individual receives for Social Security equals the benefit plus a cost of living adjustment (COLA). This adjustment is currently measured by the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W), prepared by the Federal Bureau of Labor Statistics. The CPI-W is based on the cost of basic goods like housing, food, energy, clothing, and appliances. The cost of living based on this basket of goods typically increases between two and three percent each year. However, inflation has grown much more rampant, like during the 1979s when the COLA increased along inflation.
In 2012, 62 million Americans receiving Social Security and Supplemental Security Income benefits saw their checks go up by 1.7 percent to keep pace with the rise in the CPI-W.
How Social Security will be calculated with Chained CPI
The proposal by President Obama would reduce the Social Security benefit payout, because it would use a different CPI than is currently being used to calculate COLA. Under President Obama’s proposed plan, Social Security benefit increases would not be based on CPI-W, but rather, they would be based on the Chained Consumer Price Index for All Urban Consumers (Chained CPI or C-CPI-U).
Chained CPI changes the way COLA is applied to Social Security benefits, because it is generally a lower percentage than CPI-W. The premise of Chained CPI is that if the price of one item increases, people will purchase a lower-priced alternative. For example, if the price of beef increases dramatically (like it has recently) then it is assumed that consumers will switch to an alternative product, like pork. Controversy lies in whether or not consumers actually behave this way.
What is the impact of this change?
Over time, the proposed switch to the Chained CPI for Social Security COLAs will lower the size of payments to recipients and, therefore, substantially lower the US government’s costs. Because Social Security is a self-funding mechanism, it would also lower the projected future cost of funding the program.
Doug Short with Advisor Perspectives has compiled this helpful analysis of how the Chained CPI will impact Social Security benefits.
In 2013, using the Chained CPI for COLA, the Social Security recipient would receive about 3.3% less than today’s actual payout, which equates to roughly $45 less per month.
This impact is significant, and may even mean a week’s worth of groceries to some recipients. With this in mind, there are some safeguards in place to protect those in need. Benefits for the oldest seniors, low-income seniors, veterans, and for those who are disabled would remain the same. Seniors between the ages of 76 and 85 would receive an annual supplemental payment to offset some of the slowdown in growth. In addition, programs that are geared for those in or near poverty, such as Supplemental Security Income, would be exempt from the switch to Chained CPI.
Retirement Shortfall increases with Proposed Changes
In a previous entry, we discussed how many individuals are not financially prepared for retirement. In “Seniors would see smaller Social Security checks under Obama budget” by CNN Money, it was noted that nearly two in three recipients rely on Social Security for at least 50% of their income. Furthermore, Social Security makes up at least 90% of the income received by 36% of seniors.
With the proposed changes to Social Security on the horizon, now, more than ever, it is important for you to gain as much knowledge as you can about Social Security so that you can better advise your clients.
Because of the proposed changes to Social Security funding, financial advisors who can best guide their clients into retirement will have the upper hand. Position yourself by joining us for a webinar on Social Security to become an expert in Social Security planning and find yourself helping clients become more financially secure through retirement.
Check out a sneak peek of the webinar here: