Coming Soon: Smaller Raises for Seniors?

SmartMoney

Lawmakers are considering changes to how Social Security is adjusted for inflation.

When inflation rises, retirees' social security checks keep pace with small increases. But if some lawmakers get their way, those raises may be a whole lot smaller in the future.

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As part of the current deficit-reduction talks, White House officials and Congressional leaders on both sides of the aisle are advocating changes to the way inflation is calculated. The little-noticed proposal advocates measuring inflation with the "chained consumer price index," a metric that would likely make inflation look slower than the current measurement does. That would result in smaller Social Security increases for seniors, experts say. "Seniors cannot afford this," says Mary Johnson, a senior policy analyst at The Senior Citizens League, a non-profit seniors rights advocate. "This would negatively impact not just seniors, but also many families that end up helping out these seniors financially."

For the roughly 60% of seniors who rely on Social Security for at least half of their retirement income, this is a big deal. Under the new calculation, the rate of inflation would grow at an average annual rate of about 0.3% less, on average, than under the current calculations, according to the Congressional Budget Office. If Social Security uses the new measurement to determine cost-of-living adjustments, the average retiree would receive about $18,000 less in benefits over 25 years, according to The Senior Citizens League. Or, under the new calculations, after 10 years, a 73-year-old would get a check that's about 3% smaller than he would get under the old calculations, according to the Congressional Budget Office.

Of course, lower benefits are part of the point. Using the slower-rising index is being billed by many including President Barack Obama's fiscal responsibility commission and the Bipartisan Policy Center -- as a way to generate much-needed savings to help deal with the country's mounting debt crisis. In fact, the savings could amount to an estimated $112 billion over 10 years, according to the Congressional Budget Office. "This is a start in helping us fix Social Security," says David John, a senior fellow at the Heritage Foundation.

But critics say the new proposal only makes a bad system worse. The current measurement of inflation is supposed to account for the spending habits of adults of all ages, including only a small proportion of retirees. That doesn't reflect the true inflation seniors face, says Moshe A. Milevsky, a finance professor at York University in Toronto. For example, many older people spend a large share of their budgets on items like health care, whose prices have risen about twice as fast as overall prices, according to a 2010 paper published by the Congressional Research Service.

To be sure, almost everyone agrees that the current Social Security system is unsustainable, and the current debate over the deficit has turned up the pressure. Social Security has become a target partially because of the significant cost of the program, say experts. (In 2011, the government will pay out an estimated $606 billion in Social Security, survivor's benefits and related expenditures; this number is projected to rise to more than $1 trillion in 2020, according to a report from the Social Security Administration.

Whether the new measurement will be adopted remains unclear. Some experts think at least some Social Security cuts will go through, at least in part because Obama has warned that unless an agreement on the current debate to extend the United States' borrowing limits is reached, Social Security benefits cannot be guaranteed starting on Aug. 3. A spokesman for House Minority Leader Nancy Pelosi (D., Calif.) simply said "a deal has not yet been reached," and a representative for Senator Mitch McConnell (R., Ky.), who has been vocal in his criticism of the president's budget plan and announced his own plan on Tuesday, could not be reached.

For some retirees, the proposed switch could mean more belt-tightening. For pre-retirees, it could mean saving more earlier to make up for lower benefits. On top of that, it would become more important to protect a retirement portfolio from inflation hikes, experts say. That includes considering investments that rise or keep pace with inflation, such as dividend-paying stocks, Treasury Inflation-Protected Securities, or floating-rate loan funds. What to avoid? Fixed-rate, low-yielding certificates of deposit, says Michael Wall, the founder of Wall Financial Group in Altoona, Penn.: "They're a good way to lose buying power."

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