Social Security: Little "tweaks" matter.

It's important for retirees to pay close attention to the current deficit negotiations in Washington because the "big 3" programs of most interest to retirees are chips on the table. These are Social Security, Medicare and Medicaid.

Don't think Medicaid applies to you? If you eventually need longterm care, how will you or your family handle the almost $100,000/year cost? Medicare pays for only 100 days of this type of care. Even if you have longterm care insurance, most policies cover only a set number of years at a set monthly maximum. Almost one of every two Medicaid dollars goes to pay for longterm care for the elderly or disabled, and it's quite possible it will be a program to which you or your family will turn.

Paul Krugman's column, The Big Budget Mumble, in this morning's NY Times provides some information on negotiating positions.

" As his opening bid in negotiations, Mr. Obama has proposed raising about $1.6 trillion in additional revenue over the next decade, with the majority coming from letting the high-end Bush tax cuts expire and the rest from measures to limit tax deductions. He would also cut spending by about $400 billion, through such measures as giving Medicare the ability to bargain for lower drug prices."

"So what are Republicans offering as an alternative? They say they want to rely mainly on spending cuts instead. Which spending cuts? Ah, that’s a mystery. In fact, until late last week, as far as I can tell, no leading Republican had been willing to say anything specific at all about how spending should be cut." [NOTE: I've promised to stay away from politics in these blog posts, except where politics collides with areas of fundamental interest to retirees. If this isn't such an area, I don't know what is!]

"The veil lifted a bit when Senator Mitch McConnell, in an interview with The Wall Street Journal, finally mentioned a few things — raising the Medicare eligibility age, increasing Medicare premiums for high-income beneficiaries and changing the inflation adjustment for Social Security. But it’s not clear whether these represent an official negotiating position — and in any case, the arithmetic just doesn’t work."

Krugman goes on to point out that raising the Medicare eligibility age has been looked at by the nonpartisan Congressional Budget Office which found that raising the age from 65 to 67 would save about $113 billion over the next decade. Primarily because people entering Medicare have far lower health costs than the average Medicare participant.

According to the CBO, increasing Medicare premiums for the affluent raises only $20 billion over the next 10 years, and note that they already pay higher premiums than you or I. 

And then there's the matter of Social Security. The great "fix" being floated is to reduce Social Security costs by switching from the Consumer Price Index (cpi) to the "Chained Consumer Price Index" (chained cpi) in figuring the annual cost-of-living adjustment for Social Security recipients. This would "save" about $185 billion over the next decade.

Remember, however, that no general tax revenue goes into Social Security. It is totally paid for by the FICA tax on workers and their employers. It is not responsible for a single penny of the deficit. In fact, it runs a surplus!

So why are we even talking about Social Security in terms of reducing the deficit? Welcome to the wonderful world of smoke and mirrors!

But wait, it gets better! The "chained cpi" is supposed to be a more accurate picture of the cost of living since it corrects for consumer responses to price fluctuations. When the price of beef increases, consumers buy more chicken and the chained cpi accounts for this producing a slightly lower cost-of-living figure. It's not a big difference, but here's the thing: over the course of years these small differences act like compound interest and build up. Use the chained cpi for 30 years and your monthly Social Security check will be less by almost 10% compared with using the traditional cpi.

Oh, and there's more! For several years the Bureau of Labor Statistics has been calculating a third cpi specifically designed to reflect the cost of living for those 62 and older. People of this age have greater-than-average healthcare costs which are reflected in the "CPI-E"--the "E" standing for "experimental."

Use of this measure would produce larger cost-of-living adjustments than the current CPI.

It appears, for now, that the White House understands that Social Security is not part of the problem. USA Today reports that " Treasury Secretary Timothy Geithner echoed another White House message to Republicans during a string of Sunday show interviews: no Social Security talks as part of the fiscal cliff negotiations."

"We're prepared to, in a separate process, look at how to strengthen Social Security," Geithner said on ABC'sThis Week. "But not as part of a process to reduce the other deficits the country faces."

This is an area worthy of your attention. Let your representatives in both houses of Congress know your feelings.