Practical Economics


GOP Puts Social Security in Play in Fiscal Cliff Talks

Jerome Idaszak

The choice is whether to reduce the retirement benefit by a little now or a lot more later.



Because of House Republicans, Social Security is now part of the negotiations over the fiscal cliff and the broad approach to spending cuts over the next few decades.

SEE ALSO: Kiplinger's Social Security Solutions

The Republican idea is to change the inflation yardstick that determines the annual cost-of-living increase for Social Security payouts. Such a move would probably peg inflation this year around 1.7% instead of 2%. To budget cutters, it's a big deal, saving about $110 billion over 10 years. For retirees, though, it means getting a $1,900 check monthly instead of $2,000.

This idea isn't new. Michael Boskin, chairman of the Council of Economic Advisers under President George H.W. Bush, led a commission in 1996 that concluded that the current measurement overstates inflation. But labor unions and AARP worked hard to block use of a new yardstick. Even so, change seemed likely until President Bill Clinton's encounters with intern Monica Lewinsky. Bipartisan cooperation ended when the Republican-controlled House brought impeachment proceedings against Clinton.

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Since that time in the late 1990s, change in Social Security moved offstage, and there have been no serious efforts to attack deficits and the national debt until now.

Those who oppose changing the inflation measure or other ideas, such as raising the retirement age two years, assert that Social Security is sound: After all, it's supported by a trust fund. But that's not the case.

The retirement program operates on a year-to-year basis. Talk of a "trust fund" is symbolic, referring to paper IOUs written by the Treasury every year. It collects all taxes, including payroll revenue, and writes checks for all government spending.

The mountain of IOUs is huge: about $2.7 trillion over the past 30 years. Congress and the White House know all this. For years until his retirement in 2005, Sen. Ernest Hollings (D-SC) attacked the "raid" on Social Security during annual hearings on the budget.

After a 1984 commission raised the tax rate on wages and pushed the age from 65 to 67 for full benefits, there was a cash surplus each year until 2010. The Treasury now borrows to repay the IOUs -- $49 billion in 2010 alone. With fewer workers and more retirees, the amount will continue to increase until the IOUs in the Treasury are depleted, sometime around 2033. Then? Nothing really changes. Treasury would continue borrowing, adding to the deficit, which in turn would increase the national debt.

Because the tax revenue and benefit checks have always been mixed together, many lawmakers want to reduce cost-of-living increases, push the retirement age beyond 67 or raise taxes on upper-incomers to lessen the impact on the annual budget deficit. That's why Social Security is on the table. Many seniors feel cheated, contending that they're merely getting their tax payments back. And there are enough senior citizens to block changes for a few years.

Social Security's finances aren't as complicated as changing Medicare, or formulating a new approach to defense and national security, or deciding how much to shrink the third of the budget that goes to all the other stuff government spends tax dollars on. But Social Security payments represent about a quarter of all federal spending. That's why the issue is back in the spotlight.

Change is coming because there's no alternative. If nothing is done, Social Security won't dry up. But today's teenagers will collect about 75% of the current annual benefit. That's the choice. Make a few changes now that are phased in over a couple of decades, or do nothing and eventually make big cuts.

Haven't yet filed for Social Security? Create a personalized strategy to maximize your lifetime income from Social Security. Order Kiplinger's Social Security Solutions today.



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