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Proposal Would Cut Raises For Retirees

There are calls to change the way the Social Security Administration adjusts benefits to keep pace with inflation.  / Getty Images

Amid all the hubbub over possible cuts to Social Security benefits, many experts have asserted that today’s retirees will emerge largely unscathed. The reason: Many of the proposals being bandied about — including an increase in the full retirement age — focus on those who have yet to retire.

But in a recent report, the Center for Retirement Research at Boston College concludes that momentum is gathering behind a proposal that would affect current retirees, too. Backed by “two prominent” commissions* charged with reducing the federal debt, the proposal calls for changing the way the Social Security Administration adjusts benefits to keep pace with inflation. A switch — from the current approach to using a “chained” consumer price index — would reduce the rate of increase in benefits by about 0.3 percentage points per year, the report says.

“Thus, the change would result in lower cost-of-living adjustments (COLAs) for Social Security beneficiaries,” says the report, which adds: “Moving to a chained index should be viewed as a cut in benefits.”

Over the long run, such a change could make a big difference for retirees. By the time a young retiree reaches age 85, “a COLA that is 0.3 percentage points lower per year would produce a monthly benefit that is about 6.5% lower,” says the report.

Those in favor of the change say that, in addition to wiping out an estimated one-quarter of Social Security’s long-range deficit, it would provide a more accurate measure of inflation. Why? A chained approach captures the extent to which consumers — when faced with price increases — substitute one product or service for another. For example, the report says, they might eschew pricier analog watches in favor of cheaper digital ones.

But the report’s authors, who include fellow Encore contributor Alicia Munnell, point out that the current method of calculating COLA adjustments may actually shortchange the elderly, who devote an average of 13% of their budgets to health care, versus 5% for those under 65. Because health-care expenditures tend to rise faster than overall inflation, the elderly experience a rate of inflation that’s about 0.27 percentage points higher than the measure used by the Social Security Administration, says the report.

As a result, Munnell, a Boston College professor, and her co-author conclude: Any adjustment to the COLA “should take into account both the projected 0.30 percent overstatement due to not accounting for the substitution effect and the projected 0.27 percent understatement due to not reflecting the spending patterns of the elderly.”

* The National Commission on Fiscal Responsibility and Reform (co-chaired by Erskine Bowles and Sena­tor Alan Simpson) and The Bipartisan Policy Center’s Debt Reduction Task Force (co-chaired by Senator Pete Domenici and Alice Rivlin).


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    • We did not give our money to the federal government; they TOOK the money from us and said that they would save it for when we retired. Than they went ahead and spent the money, buying votes through their programs. Now that the government has overspent they are taking it out on the elderly instead of cutting the wasteful programs that buys them votes.

    • why are the SS and medicare programs “short” in the first place? those of us who are seniors and are INVOLVED, know the answer and don’t much like the fact that the gov’t has SPENT the $$ that we gave them to “hold on to” for us until we were unable to work and would need that money!! WE GAVE IT TO THEM and they spent it for anything that came up they couldn’t “afford” at the moment! bottom line – this administration and this congress seen to think we’re stupid and are selling us a bill of goods that WE ALREADY PAID FOR!! i’m with the person that said “do away with the govt”!!! have said for years that if NO ONE VOTED, NO ONE WOULD BE ELECTED! i’m sure they’d find away around it tho. nothing’s simple! but really – i could go for nothing more than STATE govement in a heart beat! when my generation was younger and ABLE, i don’t recall EVER, NOT EVER, asking the fed’s for assistance because of a storm!! where did that come from??? maybe we should start deducting “storm security” from people’s payroll. wonder what they’d spend that money on?? haha!! and i could about guarantee, it would NOT be payment toward the national debt… SO… HELOOOO CHINA! expected to see you here sooner!

    • Prohibit the use of Federal property for one party political use. The Hatch Act?
      Give AF One a rest?

    • Reduce the entire size of the Fed Gov.

    • Everone knows that adjustments must be made now to save that program. The Gov bonds that SS trust fund holds (mask the size of the obama DEFICITS)?

About Encore

  • Encore examines the changing nature of retirement, from new rules and guidelines for financial security to the shifting identities and priorities of today’s retirees. The blog also explores news that affects retirement, from the Wall Street Journal Digital Network and around the web. Lead bloggers are reporter Catey Hill and senior editor Jeremy Olshan. Other contributors include The Wall Street Journal’s retirement columnists Glenn Ruffenach and Anne Tergesen; the Director for the Center for Retirement Research at Boston College, Alicia Munnell; and the Director of Research for Pinnacle Advisory Group, Michael Kitces, CFP.