A number of commentators have tried to argue that the reductions in future Social Security payments resulting from replacing the current method of calculating cost of living increases with “chained CPI” are so insignificant that the proposal should not have provoked the harsh negative reaction from progressives. However, because those decreases in future Social Security payments compound over time they eventually will be significant and could exacerbate the increasingly tenuous financial condition of millions of the elderly.
Here is a challenge for you. Assume you and your spouse are the “average” American couple that, after leading reasonably successful middle class working lives, now are retiring, perhaps involuntarily for one of many possible reasons. You will live for the rest of your lives on a monthly income of $3500, of which $2460 comes from Social Security, the average for two people, and the rest comes either from one or more pensions, or income from a 401-K, or similar program. Your pensions have no cost-of-living escalators. Your 401-K income is from interest or dividend paying conservative investments of about $25,000, with little volatility, but also with virtually no growth. The only portion of your income that has any potential for increases is Social Security through its cost-of-living escalators. The collapse in home values wiped out most of the equity in your home, which had represented nearly all of your net worth, and your retirement income will not support the mortgage payments. You have to sell without any profit, and will be renting a much smaller house.
Let’s do a budget for this couple that approximates the average situation for retiring middle class Americans today. I have used national averages, if known, or actual expenses, for a 1600 square foot single-family rental house in Portland, Oregon. Portland’s cost of living is close to the national average. Gas and/or electric might be higher in areas of more extreme temperatures and weather.
Monthly Fixed Expenses
- Rent of a single family home $1,345
- Public Utilities (water, sewer, gas, electric, trash collection) 450
- Communications (Internet, Cable or Satellite TV, telephone or cellphone) 225
- Insurance (Life, Auto, Renters) 350
- Medical (Medicare monthly fees, Supplementary Insurance) 500
- Prescriptions (Medicare Part D, co-payments) 200
- Total Fixed Expenses $3,070
- Retirement Income, Social Security, Pensions and/or 401-K or similar $3,500
- Balance for food, clothing, gasoline, car repairs, etc. $ 430
Could you live on this income? If you even occasionally visit a grocery store you know that $430 a month is not going to be enough to cover the cost of a healthy diet and household supplies, along with gasoline, and other miscellaneous expenses. Restaurant meals, even most fast foods, are experiences of the past, seldom to be enjoyed again, as are vacations, gifts of any significant expense, and almost everything else. Your wardrobe increasingly will be out of date, but you hope it doesn’t wear out. And what happens if you need new tires for the car, or an expensive repair? What if you have a toothache, or need new glasses? Medicare doesn’t cover either. To stop that toothache, or to be able to see properly, you will have to dip into y our 401-K, or savings, which, of course, then reduces your income. But if you have no 401-K , or other savings, maybe you have to sell some possessions, or obtain help from other family members, if you have them, and if they are able to help.
Chained CPI tries to account for the shift of consumers from one product to another when the price of the first rises. It is said to be a more accurate indicator of inflation. However it is not an accurate indicator of inflation as it affects the elderly, and probably not for the disabled. The cost of living for people over 62, the “CPI-E,” is tracked separately by the Bureau of Labor Statistics, and for the past 30 years it has been increasing faster than the general cost of living.
Two major factors affecting the elderly are the rapidly rising cost of medical care and, until 2006, a rapid rise in housing costs. There was a slowdown in the elderly cost of living after 2006, probably because of the drop in housing costs, but housing costs are rising again, especially rents. Even though Medicare covers many medical expenses, it only covers 80 per cent of major ones, and there are expenses it doesn’t cover at all. Supplementary insurance is a necessity and the cost of that continues to increase. Recent cuts in some Medicare payments, especially payments for chemotherapy treatments, have caused a crisis in cancer care. Many cancer treatment centers have begun to refuse Medicare patients.
So, what if Social Security cost-of-living increases, using the chained CPI, do not keep pace with your actual increasing costs – increased co-payments for medical care and prescriptions, annual rent increases, and repairs of your aging cars, just to name some? What will your lives be like in 10 or 15 years, when you are 75 or 85? According to a report by the Center for Economic and Policy Research on the effect of chained CPI, the compounding effect of chained CPI mounts with age, as retirees become more vulnerable. The report said, “For the average worker retiring at age 65, this would mean a cut of about $650 each year by age 75 and a cut of roughly $1,130 each year at age 85.” The amount could be more if inflation is greater in the future. From that list in the budget of basic fixed expenses, what will you do without that by then that you haven’t already done without?
This situation is dramatically different from what existed ten years ago before the Baby Boomers began to retire. For a long time prior to 2006 it was not uncommon for couples to be able to sell the family home and use the profit from that sale to buy a much smaller house, or a place in a retirement community, sometimes without any mortgage. Most people who had worked for corporations had pension plans, in addition to what they would receive from Social Security. In general, middle class couples in good health could expect to maintain a financially comfortable retirement.
That is not the case today. Baby Boomers retiring now, often involuntarily, face many great uncertainties in their futures. Most people today do not have pensions. Most 401-K plans have not accumulated the amounts necessary to produce a steady retirement income equivalent to what pensions once represented. According to a recent report, the average retiree has less than $30,000 in savings. There is a very high probability that the poverty of the elderly that had been a hallmark of our culture prior to Social Security’s enactment in the 1930s very well could return. In fact, for many it already has.
What I describe here is the grim situation that millions of middle class people face today, or will be facing in the near future. The situation is far worse for people in lower income brackets, people who are not likely to have any savings, or probably no retirement other than Social Security. They are going to be condemned to living in poverty in their later years, which in most cases, will be shortened by the financial limitations on nutrition and health care.
The brutal truth is that Social Security payments should be increasing faster than they are, just to keep up with the rising cost of getting old. In fact, Social Security payments should be higher, in general, to make up for the disappearance of pensions and the failure of 401-K programs as substitutes. Higher withholding percentages may be required. The salary cap on withholding may have to be increased. But almost certainly, nothing should be done that will reduce benefits.
There could be tens of millions of retired people in the United States in desperate financial straits in the relatively near future. Reducing benefits would be a calamity for them, and for their families. It would have a huge negative impact on the nation’s economy. And it would be economically, politically and ethically wrong.
Social Security and Medicare are compacts among all Americans that acknowledge a duty that we have to each other to provide for a decent life, and adequate medical care for our elderly. Generations have contributed to this purpose. Because Social Security and Medicare withholding taxes are used to make current payments, Baby Boomers retiring today are the first generation that paid for the retirement and medical care of others for their entire working lives. Baby Boomers did this without complaint. They accepted it as their duty to their elders, their parents and their grandparents. They were relieved to see them have secure retirements and decent medical care.
What kinds of people now would deny similar treatment to these Baby Boomers just because there are more of them, and it will cost more? The fact that there were more of them paying withholding to Social Security and Medicare probably kept those withholding percentages from rising more than they did. But now that it is their turn to collect, are we going to default on our obligations? Do Americans no longer recognize the compact that our parents and grandparents agreed to, and by which we have lived? And why would they try to cut benefits when the problems they are trying to deal with either are mostly imaginary, in the case of Social Security, or can be solved in other ways, in the case of Medicare. There are alternatives to cutting benefits. Cost increases due to the Baby Boomer bulge in the population will not go on indefinitely. Already, the under-20 population group rivals the Baby Boomers in size, and the Baby Boomer bulge in the population eventually will smooth out.
Baby Boomers retiring today have made payments into the Social Security and Medicare insurance programs their entire lives. They have a right to receive what they paid for. These are not welfare programs. These are insurance programs and for anyone now to propose any cuts in benefits is a double cross of the rights and expectations of all Americans. This must not be tolerated.
It is grossly immoral and unjust to offer to cut any of the income of a retired person in a deal that might yield higher taxes from rich people who, regardless of their tax rate, never will have to worry whether they will have enough money to buy food, or pay the rent, or fill a prescription.
If you don’t believe that, go to any supermarket for a month. Try to make that budget work.