Throughout the remainder of 2013 there will be much discussion in Washington over how to reduce spending and lower the deficit. There are many proposals but it appears that your Social Security Benefits may not be immune to cuts as part of the changes in spending laws.
When most people think of a cut, they automatically think of an immediate decrease in benefits. It’s not likely that’s the way this cut would work. Instead, the method used to calculate cost of living increases would change which would probably result in a lower annual increase to your benefit amount. While that is not a cut now, the end result is that your benefit will probably be lower in 10 years than it would have been if the current calculation was continued. To many, that still sounds like a cut.
As it stands now, Social Security cost of living increases are calculated by the Bureau of Labor Statistics using a measure of inflation know as CPI-W (Consumer Price Index for Urban Wage Earners and Clerical Workers). This index was meant to measure the prices of goods by gathering data from retailers. If prices were up, the CPI-W would increase and the following year there would be an increase in the amount of Social Security Benefits. In most years there is an increase but in some years where inflation is low, such as 2010 & 2011, there were no adjustments to the benefits amounts.
The decrease to future Social Security benefits would occur by changing the method of measuring inflation. Instead of using the CPI-W, it could be replaced with a relatively new measurement call the C-CPI-U (Chained Consumer Price Index for all Urban Consumers). This has also widely been referred to as simply “Chained CPI.” Instead of simply measuring price changes, this measurement of inflation assumes that consumers will change their purchase habits when prices increase—simply buying less, for example, or switching to store brands from the more expensive brands.
So how much of a decrease in future benefits are we talking about? The Congressional Budget Office has forecasted that using Chained CPI would cause Social Security Benefits to increase by a quarter of a percentage (0.25%) less each year than they would if using the CPI-W. The Congressional Budget office has further forecast that benefits would only drop by $1.4 billion in the first year of using Chained CPI from what they would be if CPI-W was used. But by the tenth year, payments would be almost $22 billion less each year that what they would be if CPI-W would have been used. If you add up the numbers, this change would reduce Social Security spending by approximately $115 billion dollars over the next ten years.
Those are huge numbers! But how will this cut impact an average recipient of Social Security? If your monthly benefit is $2,000 today and we assume an average inflation of 2% per year you could expect to see a monthly benefit amount of $2,438 in 10 years. If we reduce the cost of living adjustment to 1.75% with Chained CPI, the monthly benefit would be $2,379 in 10 years. That’s $708 less per year. If you take those same calculations out to 25 years you would see a difference of $2,352 less per year. For some, that change wouldn’t be too noticeable. But for the 33% of Americans who rely on Social Security for 90% of their income it’s the difference in being able to pay a water bill, groceries or some other essential need.
The opinion voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.