Social Security — Blog — Debt and Deficit

Under current law, Social Security beneficiaries receive an annual cost of living adjustment (COLA) to their payments based upon the current inflation rate. For 2017, recipient payments will increase 0.3% based upon the inflation rate as measured by the Consumer Price Index (CPI). This translates into an average payment increase of $5 per month for each beneficiary.

Any increase is better than nothing, but does anyone realistically believe a $5 per month increase will cover the increased cost of living a retiree will likely experience next year?

According to some estimates, the real cost of inflation for retirees is closer to 2%. The difference is the cost of things seniors typically buy are rising more rapidly than the average cost of all goods and services. For example, medical costs continue to rise while the cost of consumer electronics is declining (think of the cost of a big-screen tv today vs. 10 years ago). Are seniors more likely to incur medical expenses or purchase more consumer electronics?

Although seniors may need or deserve a larger COLA, there is long-term problem with higher annual increases. The higher inflation rate, the sooner Social Security will become insolvent. Social Security paid $743 billion to retirees in Fiscal 2015. A 0.3% increase translates into an extra $2.2 billion in payments for Fiscal 2016; not accounting for any increase in the number of beneficiaries. A 2% increase would cost an additional $14.8 billion. An extra $12.6 billion may not seem like a lot, but the compound effect of a 1.7% increase over 10 years would be an extra $750 billion.

Under the current projections, Social Security is expected to become insolvent in 2035. The higher the annual COLA, the sooner this will occur. Consequently, what may be good for seniors in the short-term may be bad for them in the long run.

Determining the inflation rate for Social Security payments presents a conundrum. Do we continue with the current basis for adjusting Social Security payments, or should we increase the Social Security COLA to a more realistic rate, knowing it exacerbate the long-term solvency problem?

One of the most contentious issues in modern American politics involves changes to Social Security and Medicare. The subject is often referred to as the third-rail of politics.

The third rail references the high voltage rail of electric trains and subways. Contact with the third rail can lead to death. In politics, the same goes Social Security. Proposing to change the current program can lead to political suicide, or at least the loss of an election. Since getting re-election is a high priority for most politicians, it's understandable why politicians try to avoid this topic as much as possible.

No matter how hard the resistance, Social Security and Medicare will change. Why? Social Security and Medicare programs are spending more than they are currently collecting in taxes. Ignoring the potential concerns about the Social Security Trust Fund and the "Lockbox" (which are addressed in A Sinking Nation), the U.S. government predicts the retirement surplus of Social Security will be depleted by 2034 and the disability funds will be depleted by 2023. Consequently, even without any legislative revisions, future benefits will eventually be reduced to about 70% of the amount due because of a lack of funds. Of course, Congress could proactively pass legislation to fix the problem, but it would require them to touch that third rail.

Although 2034 sounds like a long time in the future, it's less than 18 years away. Do you remember Y2k and the start of a new millennium? Seem like a long time ago? The new millennium started 16 years ago, and we're nearly halfway to 2034. In reality, 2034 will be here before you know it.

Unless something changes dramatically in Washington, don't expect Congress to take any action on Social Security in the near term. However, the fact remains... changes to Social Security will eventually occur; either through legislative changes or a lack of money.