"What will happen to current Social Security recipients if an agreement isn't reached in time?"
Put simply: Their checks may not go out!
President Obama has already said as much to major media outlets. Heck, here were his exact words to CBS News last week:
"I cannot guarantee that those checks go out on August 3 if we haven't resolved this issue, because there may simply not be the money in the coffers to do it."
And he went on to point out that it wouldn't be just Social Security checks ... it would also be plenty of other programs that cover veterans, the disabled, and other groups.
Considering that $2 of every $10 going into U.S. consumers' pockets right now comes from government programs, you can see just how catastrophic this situation could become – both on an individual level and also in the economic big picture!
Which brings me to another very large issue that many of you have been asking about ...
"What's all this talk about a new way of calculating inflation for Social Security recipients?"
Since 1950, Social Security recipients have been getting cost-of-living adjustments. And this is one of the places that lawmakers are now examining as a way to reduce the program's payouts.
Before I get into the change being considered, let's first talk about the current method, which was adopted in 1972.
It uses the change in the Consumer Price Index (CPI) from July through September vs. the same period a year earlier ... unless there was no inflation adjustment made. In that case, it goes back to the last third-quarter period when an adjustment was warranted.
As I've noted many times, CPI changes rarely mirror what we actually experience in our daily lives. This is mostly because of how the measure is constructed.
For starters, there's the idea that technological improvements in a given product mean you're getting more for your money (technically known as "hedonic regression") ... even if they're changes you don't want or need.
Meanwhile, CPI calculations don't factor in federal, state, or local taxes, even though they are probably sucking away a lot of your income. Nor does it matter that property taxes have increased substantially for many homeowners over the last decade.
And there are still other ways that the current CPI measure falls short of real-life conditions, including the way it tracks real estate costs.
But perhaps one of the most insidious parts of the CPI calculation is the idea of product substitution. Under this scenario, if corn gets too expensive, the government just figures you'll switch to carrots. So they stop tracking corn and start tracking carrots.
Yet the new method for calculating inflation – called "chained CPI" – that lawmakers are now considering only exacerbates inaccuracies related to product substitutions.
Why? Because it's based on even more product substitution!
Here's how the Bureau of Labor Statistics (the group responsible for the calculations) explains it:
"Traditionally, the CPI was considered an upper bound on a cost-of-living index in that the CPI did not reflect the changes in consumption patterns that consumers make in response to changes in relative prices."Since January 1999, a geometric mean formula has been used to calculate most basic indexes within the CPI; this formula allows for a modest amount of substitution within item categories as relative price changes."The geometric mean formula, though, does not account for consumer substitution taking place between CPI item categories. For example, pork and beef are two separate CPI item categories. If the price of pork increases while the price of beef does not, consumers might shift away from pork to beef. The C-CPI-U is designed to account for this type of consumer substitution between CPI item categories. In this example, the C-CPI-U would rise, but not by as much as an index that was based on fixed purchase patterns."With the geometric mean formula in place to account for consumer substitution within item categories, and the C-CPI-U designed to account for consumer substitution between item categories, any remaining substitution bias would be quite small."
In other words, they believe the currently-used CPI is overstatinginflation if anything!
And here's what you have to realize about tinkering with cost-of-living adjustments – since they are applied each and every year, consistently lower increases will actually create larger and larger relative benefit reductions over time!
This – along with the fact that it could be positioned as a formula change rather than an outright benefit reduction – is precisely why the idea is so popular with politicians right now.
In addition, remember that the CPI is used to calculate increases in all kinds of government matters – including federal workers' retirement benefits and income taxes.
So this could be a big deal that affects us in myriad ways!
Of course, there's one more important thing to ask ...
"Is a cost-of-living adjustment the only change we could see on Social Security in the near-term?"
A week ago, I probably would have said yes. But the latest indications are that other ideas are also on the table now, including:
- Creating a commission charged with reviewing all entitlement programs (and making further changes) ...
- Applying means testing that would reduce or eliminate benefits for higher-income recipients ...
- And further raising of the national retirement age.
These are changes I have always been predicting, mind you. It's just that I didn't think we would see them before the 2012 election.
And right now, lawmakers are still suggesting that any of these potential changes wouldn't affect current beneficiaries if they are implemented.
But again, based on the rapidly-evolving situation, there's no real reason to believe that anything is set in stone.
Whatever you do, however, please do NOT just bury your head in the sand like the vast majority of Americans are doing. Because whether we like it or not, it is looking more and more certain that the old retirement standbys are going to undergo some serious changes in the near future.
No comments:
Post a Comment