The budget plan, released Wednesday, calls for changing the way the annual cost of living adjustments for Social Security and other federal programs are calculated. Shifting to "chained CPI" from the current inflation measure could reduce the federal debt by $230 billion, but it would also mean that seniors would get smaller increases in their Social Security payments each year.
The president's proposal would provide protections for the oldest seniors, low-income seniors and veterans, and those who are disabled. Seniors ages 76 to 85 would receive a supplemental payment annually to offset some of the slowdown in growth. Also, programs that are geared for those in or near poverty, such as the Supplemental Security Income, would be exempt from the switch to chained CPI.
But the change would still make a difference for many people. Chained CPI is expected to grow between 0.25 and 0.3 percentage points more slowly than the current CPI measure.
Initially, the reduction in the growth of Social Security checks would be quite small ... between $38 and $45 in the first year, for the average retired worker. But over time, that would grow into the hundreds of dollars.
Someone who started collecting the average Social Security benefit for a retired worker in 1999 would receive $12,972 in 2012. But let's say the Social Security Administration had already been using chained CPI -- that person would get only $12,336 this year, according to the National Academy of Social Insurance. That's nearly 5% less.
The difference gets bigger over time. According to the National Women's Law Center, a retiree who was collecting $17,520 last year would see 6.5% less, or $1,139, by age 85, if chained CPI were in effect. A decade after, their payments would be 9.2% smaller, or $1,612. These calculations do not include the supplemental payments, the details of which were not released until Wednesday.
For many seniors, these decreases aren't trivial. Nearly two in three recipients rely on Social Security for at least 50% of their income. And Social Security makes up at least 90% of the income received by 36% of seniors.
"For a lot of elderly people, Social Security is virtually their only source of income," said Paul Van de Water, senior fellow at the Center on Budget and Policy Priorities. "A decrease of almost $600 a year ... for people in that situation is very significant."
That's especially true for older seniors, who have likely spent down their other assets and seen other income sources dry up. Also, these recipients are usually contending with growing medical bills, which chained CPI doesn't account for. The protections Obama is planning may mitigate the problems, but some experts don't think they'll fully shield this group.
"The older you get, the bigger the reduction you get,' said Gary Koenig, director of economic security for AARP's Public Policy Institute. "It's hitting at a time when folks can least afford it."
Women could get hit especially hard since they live longer than men and rely more on Social Security, said Joan Entmacher, vice president for family economic security for the National Women's Law Center. For the typical single elderly woman, the switch would reduce her monthly benefit by $56 at age 80, not including the supplement. This is equivalent to a week's spending on food per month.
"The typical woman beneficiary is just barely above the poverty line," she said. "She has a really hard time meeting expenses."
Regardless of what one thinks of the magnitude of the cuts, switching to chained CPI is not the solution to reforming Social Security. Additional measures will be needed to extend the entitlement program's solvency since chained CPI addresses only about 20% of the gap.
And Peter Orszag, former budget director under Obama, says the difference between chained CPI and the current CPI is overstated -- that means Social Security benefits won't be cut by as much as is being forecast.
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