Democratic Presidential candidate Joe Biden has floated a few ideas for how he would like to shore up the solvency of Social Security and increase benefits if he is elected in November, but one of those proposals might just be a little easier to accomplish than the others.
Biden wants to switch Social Security’s inflationary tether, used to calculate the annual cost of living increase (COLA), from the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) to the Consumer Price Index for the Elderly (CPI-E), an experimental index that specifically tracks the spending of households with persons aged 62 and over.
Making the switch to CPI-E would result in slightly bigger annual COLAs than under the CPI-W, according to The Senior Citizens League. TSCL research found that the average difference between the two indexes from 1983 to 2019 was 0.25% per year, which is minimal in any given year but compounds over time. Had the CPI-E index been used to calculate the COLA for 2020, TSCL said this year’s increase would have been 1.9% instead of 1.6% provided by the CPI-W.
Had the CPI-E been used to determine COLAs since 2015, the monthly Social Security benefit would be about 2% higher today. An average benefit of $1,215 per month in 2015 will increase to $1,298 per month in 2020. But had the CPI-E been used to calculate the COLAs, TSCL says that benefit would have been $26 per month more or $1,324 in 2020.
“One of the bigger problems with using the CPI-W is the fact that retirees spend their money very differently than younger working adults,” says TSCL’s Mary Johnson. “Retirees must spend more on healthcare and housing, and less on gasoline and consumer electronics.”
The Social Security COLA for 2021 is set to be announced on Oct. 13, using the traditional CPI-W index. TSCL’s Johnson recently predicted the 2021 COLA would be 1.3%, which would make it the second lowest ever paid.
The COLA is intended to protect the buying power of Social Security benefits from eroding when prices go up. But when the annual inflation adjustment doesn’t go up in sync with rising costs, the buying power of benefits erodes, chipping away at the standard-of-living of all benefit recipients. Research by Johnson has found that Social Security benefits have lost about 30% of buying power over the past 20 years.
If Biden wins the election and is able to switch the pricing index used to CPI-E, it would likely generate opposition from Republicans because the larger COLAs would result in increased benefits and therefore an increase in the overall cost of Social Security.
One analysis from the Government Accountability Office found that if CPI-E were used over a 30-year period instead of CPI-W, a retiree who had earned the national average wage would be seeing $100 more in monthly checks.
Biden’s other Social Security reform ideas might be tougher sells. In “The Biden Plan for Older Americans,” he pledges to increase Social Security benefits for low-income families and individuals, surviving spouses and older Americans, and to pay for it by raising taxes on those earning more than $400,000.
Meanwhile, President Donald Trump has not publicly commented about a preference for either the CPI-E or CPI-W index for calculating COLAs. He has essentially left Social Security alone, as promised during his 2016 campaign, in the past four years.
But recently he did sign an executive order to institute a “payroll tax holiday,” intended to boost worker paychecks by deferring their payroll taxes (used as the primary funding mechanism for Social Security) through the end of the year. He has also promised to forgive those deferred taxes without hurting the program if he is reelected.
“When I win the election, I’m going to completely and totally forgive all deferred payroll taxes without in any way, shape, or form hurting Social Security,” Trump said during an Aug. 13 press conference at the White House. “That money is going to come from the General Fund. We’re not going to touch Social Security. I said from day one that we’re going to protect Social Security, and we’re going to protect our people. And Social Security is one of the things that will be protected.”
Without future congressional action to extend the payroll tax holiday or retroactively eliminate the payroll tax, the deferred tax would have to be paid once the holiday expires, likely as part of annual income tax filings next April 15.
Veteran financial services industry journalist Brian Anderson joined 401(k) Specialist as Managing Editor in January 2019. He has led editorial content for a variety of well-known properties including Insurance Forums, Life Insurance Selling, National Underwriter Life & Health, and Senior Market Advisor. He has always maintained a focus on providing readers with timely, useful information intended to help them build their business.
