The government is poised to give you a hefty pay cut. It may not be soon — depending on your age — but it is going to happen.
And you’re going to have to work that much harder to mitigate it.
Now that the very basic taxation and revenue proposals are converging in the fiscal cliff talks, politicians are fielding some entitlement program revisions. An idea to peg Social Security increases directly to C-CPI-U, or the Chained – Consumer Price Index – Urban, is floating around.
The changes are seemingly minute. On paper, we’re just going to have an even exchange between obscure equations that are basically similar.
But that’s the whole point: If the general public can’t understand it, they don’t pay attention to it. If they don’t pay attention to it, they won’t punish politicians for it.
Keep in mind that this wouldn’t have surfaced if it didn’t result in large cuts to benefits over time… You’re going to be responsible for a larger portion of your retirement funds.
The Devil is In the Details
This situation warrants some explanation of where we are now and where this will take us.
Social Security is currently pegged to CPI-W, the consumer price index for urban wage-earners. Another inflation measure, CPI-U is used for a number of government programs, which is the consumer price index for everyone in urban areas.
CPI-U and CPI-W differ very slightly in the weighting and selection of goods and services they track. Chained CPI attempts to bring “substitution effects” into the equation. When times get tough, people will skip a thick steak and settle for chicken at the grocery store, for example.
Only economists have strongly-held views on the merits of CPI-U and CPI-W. As long as they work as a decent estimate of real inflation, there isn’t much between one or the other for us.
However, Chained CPI merits your attention. Because if and when it is applied to Social Security, it will result in cuts that will multiply over years and dramatically reduce your benefits.
Imagine a 65-year-old individual who retired in 2000. This person started with an average initial monthly benefit of $1,435 or $17,220 a year. Under the current CPI-W formula, that person would now receive up to $1,986 a month in 2013, or $23,832 a year… But if Social Security was using the chained CPI back in 2000, the sum would be around $1,880 a month, or $22,560 a year.
The seemingly inconsequential smaller increases from year to year result in a 5% cut between these scenarios. And that number only increases over time.
That is bad news, especially considering the vast number of elderly that are completely dependent on Social Security to keep a roof over their head and something in their stomachs.
But Wait, There’s More…
Unfortunately,we’re not done with the bad news.
The Tax Policy Center recently did the math on the income tax increases that would be caused by a switch to chained CPI.
At about $100 a year for most families, it is essentially a 0.19% income surtax.
A proposal to protect the most vulnerable Social Security recipients is in the works, but it will drastically reduce the effective government spending reduction. The average annual Social Security benefit was under $15,000 in 2012, and just under 40% of retirees rely on Social Security for 90% of their income. That’s a decent number of people to exclude.
If this idea sticks as the linchpin of reforms, there will be a concerted effort to apply it to as many people as possible to boost savings.
Without excluding the most vulnerable people, this seemingly innocuous change will result in a $100 billion spending reduction over 10 years — and $60 billion in new tax revenue.
You Need to Do Something
To put it as succinctly as possible: You need to do something about this. And soon.
There is no stopping the cuts that are coming to Social Security. If politicians do not change this program to include a chained CPI benchmark, they will still have to cut entitlement growth one way or another.
This method of reform is just a sneaky way of cutting benefits by about 5% per decade and adding .2% to your income tax.
Politicians don’t want to say it, hence the obscure terminology that doesn’t include the words “cut” or “tax.”
What you can do about it is secure additional income to replace what you will not be getting in the future…
There are some good options available: Dividend stocks has been stable and very profitable over the last couple years. And with easy money pouring into the economy via the Fed, that will be the case for the foreseeable future.
In fact, dividends are up more than 8% over the last year and 55% since August 2009, with no end in sight:
Wealth Daily‘s own Brian Hicks and Briton Ryle have done extensive research on dividend-paying stocks…
They recommend the following investments for investors in need some stability and peace of mind.
For your prosperity,
Adam English
for Wealth Daily
