Economists worry that President Barack Obama's proposal to link Social Security benefits to a so-called chained consumer price index (CPI) would reduce benefits for those who need them most.
“What is certain is that the switch would lower benefits,” economist Dean Baker of the Center for Economic and Policy Research told The Fiscal Times.
If cost of living adjustments (COLAs) are lower by roughly 0.3 percentage points a year, Baker notes, after 10 years of retirement benefits would be 3 percent lower.
|President Barack Obama
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"After 20 years of retirement, their benefits would be 6 percent lower and people living into their 90s and collecting benefits for more than 30 years would see a drop in benefits of more than 9 percent,” says Baker.
Baker also says changing the COLAs would affect current retirees, more than 90 percent of whom have non-Social Security incomes of less than $40,000.
Congress’ Joint Committee on Taxation “recently estimated that by 2021, 69 percent of the higher tax revenue gained from switching to the chained CPI would come from taxpayers making less than $100,000,” Baker points out.
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Proponents of linking COLAs to a chained CPI say the measure would cut costs and might more accurately adjust benefits for increases in the cost of living and save more than $200 billion over 10 years, $112 billion of which would come from lower Social Security COLA increases.
However, Investors.com reports that unless the scope of Social Security changes under consideration is broader than reported, Obama's statements exaggerate the extent by which the program's finances would improve.
Even granting the most-generous assumptions — including that the $2.6 trillion trust fund is money in the bank — the proposal to adopt a lower inflation measure for setting annual cost-of-living adjustments would erase just 23 percent of Social Security's long-range shortfall.
After trust-fund exhaustion, which might be pushed from 2036 to 2040 under the COLA change, tax revenue would cover 81 percent of promised benefits vs. 78 percent under present law.
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