Should you worry about a cut in your annual Social Security cost-of-living increases? Or an increase in the age of eligibility for Medicare, from today’s 65 to 67?
Both of these ideas are entangled in Washington political calculations and, if they take effect, could have major implications for your retirement.
Simpson-Bowles 2 and Older Americans
Last Friday, Alan Simpson, a former Republican senator, and Erskine Bowles, a former Clinton White House chief of staff, unveiled the latest version of their plan to fight the deficit.
(MORE: Obama’s Budget Proposals and Your Wallet)
The new Simpson-Bowles $2.5 trillion deficit reduction plan would gradually raise the Medicare age of eligibility to 67 by the mid-2030s and expand the use of Medicare premiums linked to income. It would also cut annual Social Security cost-of-living increases, setting aside 20 percent of those savings to provide a special one-time benefits increase for the oldest beneficiaries and disabled people who’ve been collecting benefits for 20 years or more.
Right now, there is a stalemate, with no movement discernible for President Barack Obama and Congress to alter either Social Security or Medicare. But all this could change quickly if the political winds shift — that’s what you hear when talking to veteran observers and participants in the Capitol.
How a Grand Bargain Could Happen
Obama, who won’t be running again, is looking for a so-called grand bargain with Republicans to dramatically reduce the federal budget deficit. To get it, he has already offered to tinker with Social Security, one of the Democratic Party’s most sacred institutions.
As Next Avenue has noted, Obama’s 2014 budget proposal calls for cutting the size of Social Security’s annual cost-of-living benefit increases by switching to an inflation measure known as the chained CPI starting in 2015. The chained CPI grows, on average, about 0.3 percent a year more slowly than the standard Consumer Price Index. The president’s proposal would save the government roughly $230 billion over 10 years.
The chained CPI idea enrages many liberals, however, and scares lots of Democratic members of Congress planning to run for re-election in 2014.
Liberals Opposed to a Social Security Recalculation
The leader of the House Democratic Caucus, Rep. Xavier Becerra (D-Calif.), was blunt in his attacks. “It just doesn’t make sense," he said at a committee hearing, "to design a benefit cut that hits seniors, disabled workers, veterans and widows with the biggest benefit cuts at the time we know they need Social Security the most.”
(MORE: The Social Security Changes You Can Expect)
The White House seems to think the risk of stirring up anger in its own party is worth taking if that’s what it’ll take to bring Republicans to the table and accept the idea of additional tax revenue as part of a big deficit reduction package.
Whether Republicans go for this tradeoff depends on their political calculus.
What the Republicans Want
“Do Republicans want the deal more than they want to fight the Democrats?” wonders Len Nichols, director of the Center for Health Policy Research and Ethics at George Mason University. “If they want the deal, they’ll give on revenues. If not, they will try to use the chained CPI as a wedge to drive the Democratic Party away from the president.”
Nichols thinks the “Democratic Party core wants the fight more than the deal because they think they can win the next election and minimize the hit on Social Security benefits.”
To soften the anger within his own party, the president proposed a “bump” in benefits at age 75 and at 95, similar to what’s in the new Simpson-Bowles plan and aimed at easing the impact of the cost-of-living reduction.
But that hasn’t placated liberal Democrats.
“At age 85, the age at which seniors tend to depend much more on Social Security, the annual benefit cut would be almost $1,000 a year,” Becerra said. “And the cut grows to almost $1,400 a year if the individual is lucky enough to live to be 95.”
Opponents of any change in the Social Security CPI have collected 2.4 million signatures and are keeping the pressure on the White House.
“We shouldn’t be using Social Security as a bargaining chip and those who want to protect Social Security are winning in the court of public opinion,” said Eric Kingson, a founding co-director of Social Security Works, one of the key activist groups fighting changes to the retirement program.
(MORE: 5 Myths About Medicare Dispelled)
Medicare's Eligibility Age
As for raising Medicare’s eligibility age from 65 to 67, Obama recently ruled out that idea, but Republicans favor it and the president reportedly backed the notion during earlier negotiations with Congress.
With opposition from the liberal base of his party to changing Social Security and Medicare, Obama would need to get a big concession from Republicans on taxes to broker a deal that could pass Congress.
That hasn’t happened yet and, at the moment, seems unlikely.
"The president got his tax hikes on January 1,” said Speaker John Boehner (R-Ohio). "The talk about raising revenue is over.”
How the Sequester Could Change Everything
But the mood in Washington could easily swing if the budget sequester finally starts inflaming and agitating the public.
“The broader the impact of the sequester, the greater the chance we will see a grand bargain," says William Pierce, a senior vice president at APCO Worldwide, a consulting and public affairs firm, and a veteran of Republican politics. “The likelihood of a grand bargain will be amplified by examples of the sequester’s impact that the public finds truly objectionable or unacceptable.”
One example: Recent layoffs of blind workers across the country because the U.S. General Services Administration and the Department of Defense cut back on orders of items those employees make, like shirts and pants for the military and paper products.
Robert Blancato, president or Matz, Blancato & Associates, a government affairs and advocacy firm, and a veteran of Democratic politics, says the political parties will move toward making changes in their positions only if the idea of deficit reduction “trumps these issues of principles.”
At the moment, “the crystal ball is pretty cloudy,” says John Rother, the former chief policy strategist at AARP and now president and chief executive of the National Coalition on Health Care, whose members include insurers, medical providers and businesses.
Rother said that when he talks to senior aides on Capitol Hill and asks them how a deal will happen, “they shake their heads and say, ‘I don’t know.’”