Chipping away at entitlement reform

Chained CPI, increased means testing for Medicare and a proposed new payroll tax hint at future action

Mar 5, 2018 @ 10:47 am

By Mary Beth Franklin

The 2034 deadline when the Social Security trust funds are scheduled to run dry gets closer every day. At that point, there would be enough revenue from earmarked payroll taxes to pay about 75% of promised benefits — assuming Congress does nothing to fix the situation between now and then.

I don't think Congress will stand by idly while the most popular federal program in history crashes and burns. And the fix is not exactly rocket science. A combination of higher payroll taxes and benefits changes — such as raising the full retirement age to 70 for today's toddlers — could put the nation's critical retirement system on solid financial footing for the long haul. But it takes political will, and that seems to be in short supply.

However, recent changes to inflation adjustments to tax brackets and further means testing for Medicare Part B premiums for very high-income retirees could hold some hints about the direction of future entitlement reforms.

Plus, a new proposal from a trio of well-known policy experts would create mandatory retirement savings accounts financed by additional payroll taxes to enable workers to postpone the age when they claim Social Security, increasing their monthly benefits.

Chained CPI

The new tax law mandates the use of an alternative measure of inflation, the chained consumer price index, to adjust the tax code for inflation. The chained CPI attempts to replicate consumer behavior in response to supply and demand. For example, the chained CPI assumes that when beef prices rise, more people will switch to less-expensive chicken, slowing the overall level of inflation.

"It's hard to imagine a consumer price index that would provide even less generous cost-of-living adjustments than we've seen over the past nine years," said Mary Johnson, a Social Security policy analyst for The Senior Citizens League, a nonpartisan advocacy group for retirees.

There was no increase in Social Security benefits in 2016, followed by a miniscule 0.3% COLA in 2017 that boosted average benefits by about $5 per month. This year's 2% benefit hike was virtually wiped out by a parallel increase in Medicare premiums.

Had the government adopted the chained CPI when it was first launched in 2001, Social Security benefits would be about 5% lower than today, reducing average benefits by about $57 per month and by a total of more than $6,000 over that period, according to a new report from The Senior Citizens League. The Congressional Budget Office has estimated that using the chained CPI to index Social Security and other federal programs would reduce federal spending by $182 billion through 2026.

"Now that Congress has used the chained CPI to index the tax brackets and the standard deduction, the chances are higher that chaining the COLA could be next," Ms. Johnson warned.

Soak the Rich

High-income retirees already pay more for Medicare Part B premiums, which cover outpatient services, and Medicare Part D prescription drug plans. Starting next year, a new income-related monthly adjustment amount will be added affecting individuals with incomes over $500,000 and married couples whose combined income tops $750,000. The direction is clear: In the future, high-income retirees can expect to see their benefits scaled back, the amount of taxes they pay on those benefits increased, or both.

Delaying Social Security

One way to increase retirement security in an era of disappearing pensions and increasing lifespans is by having people delay claiming Social Security retirement benefits until those benefits are worth more at an older age. But not everyone can afford to delay. In 2014, two-thirds of new Social Security beneficiaries were younger than full retirement age, resulting in a permanent reduction in their monthly benefits.

A new proposal from leading retirement experts at the AARP Public Policy Institute, the Mercatus Center at George Mason University and the Brookings Institution would create mandatory retirement savings accounts, called Supplemental Transition Accounts for Retirement, or Starts. Everyone under full retirement age would be required to participate. The accounts would be financed by an additional 2% payroll tax split evenly between employers and employees.

Prior to full retirement age, every individual would be required to exhaust their Start account's assets before claiming Social Security. Social Security benefits would begin once beneficiaries exhaust their Start assets or reach full retirement age. The goal of Starts is to allow a delay in the claiming of Social Security benefits for about two to three years from the date the worker would otherwise claim benefits, increasing monthly Social Security benefits by between 14% and 25%, depending on the original claim age.

It's an interesting proposal. Does it have a chance? Who knows. But I think it is encouraging that a variety of proposals that could eventually work their way into inevitable Social Security and Medicare reform legislation are being kicked around by academics, policy wonks and advocacy groups. Eventually, Congress will have to join the party. I don't expect any major changes before the 2020 presidential election, but after that, the issue of entitlement reform will be ripe for debate.

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