Social Security Changes: A Recipe For A Demographic Disaster

by: Wall Street Wisdom

In his budget released Wednesday, President Obama proposed basing the way the annual increases are calculated on "chained CPI," which grows more slowly than the current inflation measure, which would result in seniors getting smaller bumps in their Social Security payments each year. Though the difference would be relatively small at first, it would grow into hundreds or even thousands of dollars over time - a big hit for the nearly two-thirds of recipients that rely on Social Security for at least 50% of their income. Social Security also makes up at least 90% of the income received by just over one-third of seniors.

While cutting Social Security got the predictable applause from the Washington Post and other Washington establishment types, it prompted far more outrage among the president's base than he had anticipated. As a result, Obama's people were busy rewriting the plan at the time the budget was released, trying to ameliorate some of its worst effects.

However, the basic objection remains. Why is a Democratic president trying to cut Social Security in response to a crisis created by a combination of Wall Street greed and Washington corruption and incompetence?

If we compare the most recent GDP projections from the Congressional Budget Office with the pre-crisis projections from 2007, the crisis will cost the country more than $17 trillion in lost output. This is more than $50,000 per person. And, rather than making the people responsible pay the cost, President Obama is now looking to cut the $1,250 monthly Social Security check that provides more than half of the income for the typical retiree.

I have listed some interesting facts about the social security benefits programs below:

  • Nine out of 10 individuals age 65 and older receive Social Security benefits.
  • Among elderly Social Security beneficiaries, 53% of married couples and 74% of unmarried persons receive 50% or more of their income from Social Security.
  • Among elderly Social Security beneficiaries, 23% of married couples and about 46% of unmarried persons rely on Social Security for 90% or more of their income.
  • An estimated 161 million workers, 94% of all workers, are covered under Social Security.
  • By 2033, there will be almost twice as many older Americans as today -- from 43.4 million today to 75.7 million.

Maybe it's just me, but I happen to find the last statistic striking. The world is aging, and the numbers show it. The amount of older individuals has tripled over the last 50 years, and will continue to rise into the second decade of the millennium. If the Obama administration cuts social security benefits over time, while the number of elderly people is growing exponentially every year, isn't that a recipe for disaster?

Seniors were also furious with Obama, saying he is reneging on his promise not to touch Social Security. More than a few suggested politicians in Washington should cut their salaries before slicing the benefits of the elderly.

One underappreciated point is that Social Security benefits millions of children and working-age Americans, as well as older adults. According to calculations of census data performed by the Center on Budget and Policy Priorities, a left-leaning Washington research group, Social Security keeps about 21 million Americans above the poverty line every year. About a third of those people are younger than retirement age, and about 1.1 million of them are under age 18.

It is not just those very low-income families that benefit, either. As of 2011, about six million children, or 8 percent of all people under 18, lived in a household receiving Social Security benefits. In part, that is because so many households with children also include a grandparent. But more than four million children are direct recipients of benefits, too, often because they have a deceased or disabled parent.

President Obama's chained C.P.I. proposal does include protections that would prevent benefit reductions for many of the most vulnerable households. Means-tested benefit programs - like the Supplemental Security Income program - would not be affected, for instance. And economists believe that the switch to chained C.P.I. would have a negligible impact on the poverty rate over all, while reducing poverty for the very old.

Nevertheless, reductions in Social Security benefits would mean reductions in family incomes, including those of millions of families with children. And children who qualify for Social Security benefits because they have a disabled, deceased or retired parent or guardian would see slower-growing benefits too. Simply put, seniors as well as everyone else in this country cannot afford these cuts, and unless President Obama and his administration revise their plan, we could see a demographic disaster over the next few decades.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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