Changing to Elderly Index for COLA Calculation Will Be Insignificant

By on September 15, 2016 in Retirement with 90 Comments

Image of Social Security cards

Late last week, Democratic Reps. Linda T. Sánchez, Mark Pocan, and Michael M. Honda announced new legislation, H.R.5952 – Strengthening Social Security Act of 2016, to expand Social Security.

Expanding Social Security has become a dividing line in many Congressional races where supporters want to create a visible separation with the GOP which largely offers nothing but benefit cuts far in the distant future.

Despite all of the yeas and nays in the discussion about expanding Social Security, the concept remains little more than fluid jargon that enables the listener wants to hear what he wants to hear. Hillary has a flavor of expand. Bernie Sanders has a different meaning of expand. If you listen long-enough, you will find someone willing to give you more benefits.

Rep. Sánchez and supporters claim that this legislation would ensure that Social Security remains a system that works for every American, boosting benefits for all seniors specifically widows/widowers while stabilizing the long-term finances of the program.

In reality, it does neither according to an assessment completed by the Social Security Administration. The legislation does not contain an across the board increase in benefits. It seems designed to help the affluent rather than the poor. Finally, it does not restore the system to longer-range solvency.

Ultimately, the legislation raises an estimated $10.6 trillion, and immediately commits more than $6 trillion of that amount to more spending. If that $6 trillion had been reserved for the future, the legislation might extend Social Security for 50 years rather than 14 years.

This legislation illustrates many of the obstacles to expanding Social Security in a socially acceptable way. It is very difficult to help the poor and needy with a program that pays benefits based on past contributions. If you expand Social Security, the largess will flow to those people who had the best jobs over the longest careers.

No expansion staple demonstrates this problem more clearly than the transition to a new COLA adjustment. Supporters argue that the current COLA adjustment does not reflect the cost-of-living. Even if their beliefs are justified, the change to CPI-E rewards beneficiaries who collect the highest benefits. Over 25 years, someone collecting $20,000 a year would reap double the benefit over one receiving $10,000 a year.

The COLA change is the only adjustment that applies to all beneficiaries. For the beneficiary at the poverty line, ($11,367) the separation of CPI-W and CPI-E is slightly less than $25 per year. The retiree who collects $24,000 will see an improvement of nearly $50 per year.

The largest expansion appears to be the benefits of existing and future spouses. If you are collecting spousal benefits, you would reap a 50 percent bump in your benefit level. Currently that increase would be about $325.

This sounds impressive until you realize that only 22% of retirees collect under the record of their spouse. That sounds worthwhile until you realize that about two-thirds of these retirees already collect widow/widower benefits which are 100% of their spouse’s benefits. In the end, this proposal deals with an audience of 2.3 million out of nearly 60 million beneficiaries.

That audience will likely fall over time. The file and suspend rules, which were terminated earlier this year, provided an incentive for workers to collect spousal benefits. These retirees are collecting spousal benefits temporarily before filing a delayed claim on their own record.

Neither of these changes are retroactive. If the existing retiree elected to collect under his own record instead of spousal benefits, he or she is not in a position to refile to collect the larger spousal offer. Similarly, the change in CPI does not help a poor senior in advanced years because collects only the adjustments going forward.

Who gets $6 trillion of help? It is largely future retirees. People who were born in 1958 and before will get little assistance. Those born in 1959 and later will see substantial increases in benefits over their lifetime. The downside of this help is visible today. Every dollar paid today comes from a future retiree starting in 2048. That dollar comes from the retirement promise of a guy who is 35 today.

The core problem with expanding Social Security in this fashion is the framework left to us by FDR which is supposed to protect the system from the heavy hand of politics. He didn’t want politicians, whether Rep. Sanchez who might increase benefits or Sen. Rubio who has proposed reducing them, to set benefit levels for non-programmatic reasons. He put those contributions in place to give workers a legal, moral, and political right to benefits – that are not subject to the whims of politicians.

This concept draws a lot of interest in voters who think that they will benefit personally. That isn’t always the case.

© 2016 Brenton Smith. All rights reserved. This article may not be reproduced without express written consent from Brenton Smith.


About the Author

Brenton Smith (A.K.A. Joe The Economist) is the founder of “Fix Social Security Now” which provides information on all alternatives in the public debate on Social Security through its site www.FixSSNow.Org.