Chained CPI Would Reduce the Growth Of Future Social Security Benefits


Social Security is a vital program that is on a sure path toward insolvency. That's the cold, hard fact worth confronting at the start of any conversation about social insurance reform. The simple reason is demographics: as our population grows older, more people are taking out of the program and fewer people are paying in. By 2020, Social Security will be running cash negative and will have to start drawing on its so-called trust fund, which is currently chock full of government IOUs. The worse news is that this fund will be empty by 2033, according to the program's trustees

That means if nothing is done between now and 2033, benefits for all retirees will immediately be cut by 25% or payroll taxes must be immediately increased to 16.7% from 12.4%, or some combination between the two, in order to keep the program financially afloat. Either way, young Americans will disproportionately feel the pain. So when people say things like "hands off Social Security," what these champions of the status quo are really saying to young people is "hands of my Social Security, and forget about yours."

Most millennials already know this: 52% believe leaving Social Security (and Medicare) untouched would impose too much of a financial burden on younger generations, and 54% believe it is unlikely these programs will be able to pay future benefits at the same levels as today, according to Pew Research.

The good news is sensible reforms that are put in place now can dull the impact of any changes and can ensure they are distributed more fairly among all generations. 

For example, the president is expected to introduce one potential reform in his budget tomorrow, known as Chained CPI. This would reduce the growth of future Social Security benefits (as opposed to "cutting" current levels of benefits) by tying annual increases to a more modest and accurate measure of inflation. The main difference compared to the current measure of inflation is that Chained CPI would account for the fact that as prices change for similar goods, people will often opt for the cheapest option.

What would the net impact be of this reform?

That depends on how you look at it. On one hand, over the next 20 years, Chained CPI would mean the average retiree would see about 6% less in total benefits than what is currently scheduled. On the other hand, Chained CPI would also save money and help cover one fifth of the total shortfall in Social Security, which means in 2033 there would no longer have to be an automatic reduction in payments. Thus, in that year and the years to follow, Chained CPI actually represents a 25% benefit increase in benefits compared to current law.

Of course, Chained CPI alone is not enough to keep Social Security solvent over the long-term. In the context of a larger deficit reduction agreement, more would be needed. Other sensible ideas include increasing the cap on wages subject to the Social Security payroll tax and gradually increasing the retirement age. These changes would help bring the program into the 21st century where Americans are earning more and living longer than when Social Security was established.

Unfortunately, not everyone is taking a sensible, long view of the problem. That's partially because Social Security is an emotional issue, not just a mathematical one, for many Americans. This is understandable. About 46% of unmarried seniors, for example, rely on Social Security for 90% or more of their income. That includes my grandma, whom I remember cursing the government up and down when there was not a cost of living adjustment in 2009 and 2010 while her rent and health care were increasing at the same time. In this sense, any mention about benefits being on the table for reform elicits kneejerk opposition.

But reforms can be targeted to avoid putting vulnerable seniors in an even more vulnerable financial position; indeed that is the whole point of the program. At the same time, a generationally balanced solution requires everything being on the table, including benefits, in order to avoid disproportionately burdening my generation. I know my grandma wouldn't want that either.

Although you may not hear it from special interest groups that focus on fear rather than facts, it is indeed possible to strike a balance between protecting seniors and keeping Social Security solvent for future generations through common sense reforms – including Chained CPI. And the sooner we act, the better off everyone will be.  

Nick Troiano is co-founder and field director for The Can Kicks Back, a non-partisan and Millennial-driven campaign to fix the national debt and reclaim our American Dream.