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As I first mentioned in an e-mail alert last week, the ongoing debt negotiations in Washington now include serious talks about alterations to the Social Security program.
A number of you have since been asking questions about how things might shake out, so I’d like to address some of them today.
Let’s start with the biggest question …
“What will happen to current Social Security recipients if an agreement isn’t reached in time?”
Put simply: Their checks may not go out!
President Obama has already said as much to major media outlets. Heck, here were his exact words to CBS News last week:
“I cannot guarantee that those checks go out on August 3 if we haven’t resolved this issue, because there may simply not be the money in the coffers to do it.”
And he went on to point out that it wouldn’t be just Social Security checks … it would also be plenty of other programs that cover veterans, the disabled, and other groups.
Considering that $2 of every $10 going into U.S. consumers’ pockets right now comes from government programs, you can see just how catastrophic this situation could become – both on an individual level and also in the economic big picture!
Which brings me to another very large issue that many of you have been asking about …
“What’s all this talk about a new way of calculating inflation for Social Security recipients?”
Since 1950, Social Security recipients have been getting cost-of-living adjustments. And this is one of the places that lawmakers are now examining as a way to reduce the program’s payouts.
Before I get into the change being considered, let’s first talk about the current method, which was adopted in 1972.
It uses the change in the Consumer Price Index (CPI) from July through September vs. the same period a year earlier … unless there was no inflation adjustment made. In that case, it goes back to the last third-quarter period when an adjustment was warranted.
As I’ve noted many times, CPI changes rarely mirror what we actually experience in our daily lives. This is mostly because of how the measure is constructed.
For starters, there’s the idea that technological improvements in a given product mean you’re getting more for your money (technically known as “hedonic regression”) … even if they’re changes you don’t want or need.
Meanwhile, CPI calculations don’t factor in federal, state, or local taxes, even though they are probably sucking away a lot of your income. Nor does it matter that property taxes have increased substantially for many homeowners over the last decade.
And there are still other ways that the current CPI measure falls short of real-life conditions, including the way it tracks real estate costs.
But perhaps one of the most insidious parts of the CPI calculation is the idea of product substitution. Under this scenario, if corn gets too expensive, the government just figures you’ll switch to carrots. So they stop tracking corn and start tracking carrots.
Yet the new method for calculating inflation – called “chained CPI” – that lawmakers are now considering only exacerbates inaccuracies related to product substitutions.
Why? Because it’s based on even more product substitution!
Here’s how the Bureau of Labor Statistics (the group responsible for the calculations) explains it:
“Traditionally, the CPI was considered an upper bound on a cost-of-living index in that the CPI did not reflect the changes in consumption patterns that consumers make in response to changes in relative prices.
“Since January 1999, a geometric mean formula has been used to calculate most basic indexes within the CPI; this formula allows for a modest amount of substitution within item categories as relative price changes.
“The geometric mean formula, though, does not account for consumer substitution taking place between CPI item categories. For example, pork and beef are two separate CPI item categories. If the price of pork increases while the price of beef does not, consumers might shift away from pork to beef. The C-CPI-U is designed to account for this type of consumer substitution between CPI item categories. In this example, the C-CPI-U would rise, but not by as much as an index that was based on fixed purchase patterns.
“With the geometric mean formula in place to account for consumer substitution within item categories, and the C-CPI-U designed to account for consumer substitution between item categories, any remaining substitution bias would be quite small.”
In other words, they believe the currently-used CPI is overstating inflation if anything!
And here’s what you have to realize about tinkering with cost-of-living adjustments – since they are applied each and every year, consistently lower increases will actually create larger and larger relative benefit reductions over time!
This – along with the fact that it could be positioned as a formula change rather than an outright benefit reduction – is precisely why the idea is so popular with politicians right now.
In addition, remember that the CPI is used to calculate increases in all kinds of government matters – including federal workers’ retirement benefits and income taxes.
So this could be a big deal that affects us in myriad ways!
Of course, there’s one more important thing to ask …
“Is a cost-of-living adjustment the only change we could see on Social Security in the near-term?”
A week ago, I probably would have said yes. But the latest indications are that other ideas are also on the table now, including:
- Creating a commission charged with reviewing all entitlement programs (and making further changes) …
- Applying means testing that would reduce or eliminate benefits for higher-income recipients …
- And further raising of the national retirement age.
These are changes I have always been predicting, mind you. It’s just that I didn’t think we would see them before the 2012 election.
And right now, lawmakers are still suggesting that any of these potential changes wouldn’t affect current beneficiaries if they are implemented.
But again, based on the rapidly-evolving situation, there’s no real reason to believe that anything is set in stone.
Groups like AARP have already been making their opposition of such measures known. Yet I think the most important question you have to ask yourself right now is this …
“Am I doing everything I can to insulate my own retirement from this mess?”
You don’t have much control over what we’ve just been talking about.
Sure, you can write letters to your representatives. You can stand outside with a picket sign. And you can certainly make your opinions felt through your votes.
But realistically, I think your best bet is to focus on the things that you CAN control.
One of them is your personal budget, whether you’re already retired or far from it. After all, there are always creative new ways to trim expenses or save some additional money.
And obviously, you can also control how you invest your personal nest egg with an eye toward the very best combination of safety and growth. To hear about the investments and strategies that are my personal favorites right now, just click here.
Whatever you do, however, please do NOT just bury your head in the sand like the vast majority of Americans are doing. Because whether we like it or not, it is looking more and more certain that the old retirement standbys are going to undergo some serious changes in the near future.
Best wishes,
Nilus
P.S. Based on everything I just said, you can see why it’s imperative that you find investments that can give you new – and growing – income streams. So you really should watch my brand-new video presentation on the 16 dividend superstars to buy right now while there’s still time to act!
{ 14 comments… read them below or add one }
PLease, stop spreading incorrect information, all SS checks will go out, Obama is just trying to scare people, SS has funds till 2037 and the funds have nothing to do with a government shut down or not, so any shut down in the government will not affect the payments.
Stop the insanity already.
Hi Nilus,
Another scare tactic; it’s unconscionable of Obama to try to brainwash Seniors in order to promote his reelection. I hope it really backfires!
Nilus,
You know as well as I that there are enough revenues coming into the government to cover Social Security payments without raising the debt limit. I believe you’re doing a real dis-service to your readers by not mentioning this. The top two priorities should be paying the interest on our debt and Social Security…and the revenue is there to cover both. Only some political move by Obama and the Treasury Secretary could cause the US to default on these two payments.
The checks can go out for Social Security, not because funds are available through 2037 (they’re not) or because the government has other funds (it doesn’t ), but because of a quirk in accounting for the federal debt. Either the President doesn’t know about this or he is simply trying to scare us. Here’s why, included in the $14.2 trillion authorized debt is approximately $2.6 trillion that the federal government owes the Social Security Trust Fund. Thus the treasury can borrow up to that amount from the public (China, Japan, pension funds, etc.) and pay it to the trust fund without increasing the total debt outstanding. With money in the Trust Fund, Social Security checks can go out.
Unfortunately, this maneuver doesn’t change the fact that the federal government is bankrupt many times over.
Nilus,
What will happen to the FDIC insurance if the debt ceiling is not increased?
If a bank goes bankrupt while the debt ceiling has not increased, will the people with savings in that bank lose their money even though the account is FDIC-insured?
Thank you.
The non-entitlement source of the debt problem is very fixable. Bush’s/Obama’s Wars, Bush’s/Obama’s Tax cuts, in the face of those wars, and Bush’s/Obama’s bailout of the banksters. The bailouts are out the door and gone. But the wars with the taxcuts can end. Or, If we want wars then pay the taxman. If we stop warring maybe we can keep our taxcuts.
Anyone here study the fall of the Roman Empire? The American Empire has hit it’s peak. Our massive expeditures on military deployments around the world (See Roman Empire) have done it end.
Tighten your belts, America’s run is over.
Good points Martin & Jim. Why don’t they try selling War Bonds or Social Security Trust Fund Bonds? Savings accounts are paying 1% or less. They must be to busy watching Fox News bypass the obvious on a daily basis.
about 200 billion comes into the fed coffers every month. About 130 or more goes to ssi and medicare. The rest goes into obamas pocket. Well, thats probably not entirely true, but it seems as though he has blown a lot of our money on junk food and toys for his kids. So quit spreading th lies he is and do your job.
Government income is about 2.1 T and expenses 3.6 T. Someone is not going to get paid if the USA defaults. The government does not have to pay SS benefits with SS contributions. They can pay the interest on the debt and for the wars. There are no guarantees that SS checks will go out and Nilius is correct.
I DO NOT KNOW I CAN SURVIVE WITH NO SOCIAL SECURITY CHECK, IT IS THE ONLY INCOME I RECIEVE. I AM 73 YEARS AND CAN NOT WORK ANYMORE. WHY NOT TAKEN IT OUT OF GOVERMENT WORKERS CHECKS? I WOULD BET THEY WOULD GET THINGS UNDER CONTROL IF THIS WAS HAPPENING TO THEM.
Maybe all of the retired workers and those workers who are now disabled who worked all their lives for many, many years paying their hard working earnings into the Social Security system. Should stand up now and demand that all public servants, especially all of our elected Congressional Officials from the top down WILL ALL BE CUT FIRST……NO MORE PAYING TWO HUNDRED THOUSAND DOLLAR BENEFIT CHECKS TO OUR ELECTED REPRESENTATIVES AND THEIR INSURANCE MEDICAL COVERAGE WILL ALSO BE CUT FIRST. I WONDER HOW LONG THAT WOULD LAST? OUR ELECTED OFFICIALS MUST SET THE EXAMPLE FIRST. THEY ARE ALWAYS WANTING TO PICK ON THE HARD WORKING POOR FOLKS FIRST, WHO HAVE ALREADY WORKED AND PAID ALL THEIR DUES AND CAN BARELY MAKE IT. HOW WOULD YOU LIKE TO LIVE OFF A 1000.00 A MONTH SOCIAL SECURITY CHECK AND ONLY TO BE TOLD YOU AR THE FIRST ONE TO BE CUT, WHILE OTHERS WHO HAVE NOT PAID THEIR DUES ARE MAKING TWO HUNDRED THOUSAND DOLLARS A YEAR AND THEY WILL STILL GET THEIR CHECKS? IT’S JUST NOT RIGHT TO PICK ON THE POOR WHO HAVE WORKED ALL OF THEIR LIVES AND PAID THEIR DUES INTO THE SYSTEM? THE EXAMPLE OF CUTTING BACK MUST FIRST BE DONE BY OUR ELECTED OFFICIALS AND I HAVE NOT SEEN ONE COMMENT ABOUT THAT YET?
Oh…another way to reduce the government debt. Demand the government stop rewarding all of these corrupt investement firms and banks who stole and wasted trillions in tax payer monies, when the government gave them trillions a few years back, trying to bail them all out. They are the ones who first got us into this financial disaster and should all go to prison. To add to the insult upon insult to hard working tax payers, they are still allowed by our government to just sit on our tax payer money as an investment for their financial gain, while not being required to recirculate the tax bail out money, by lending it out to the small businesses and consumers while they just stand by watching our economy economy suffer, waiting for the government and economy to collapse. Now tell me, how patriotic is that, thanks to Corporate America Investment Firms? Maybe you should write abou that and create ideas how they could repay the tax payer with interest?
Oh……I just thought of another easy way to reduce trillions in Government Wasteful Spending. Stop wasting trillions of dollars on these wars that the host country don’t want us there? Easy…just pack up and bring the boys home…….and stop giving away trillions of U.S. Tax Dollars in Foreign Aid to Governments whose Nations could care less about America…..duh…. It don’t take a rocket scientist to reduce wasteful spending that got us into this hole of a debt. There are many ways to reduce the U.S. debt than picking on older retired and disabled folks who have already payed their dues and even pay 110.00 per month out of their little 1000.00 a month check for medicare coverage. How come you don’t create a report on these wasteful spending issues? All of these issues are the main reason why our Government is in this awful financial disaster. We were not born yesterday and know the real truth about wasteful Government spending, led on by all of the corrupted unpatriotic so called American Investment firms and their corrupted employees.
Anyone worried about a influx of suicides of people even being led to believe they won’t get SS checks?