As Benefits Increase, Social Security Remains on Unsustainable Path

Blog Post
Friday, October 12, 2018

Social Security benefits for more than 67 million Americans will increase 2.8 percent next year, the federal government announced yesterday. The increase, which is tied to the government’s Consumer Price Index (CPI), is the highest in seven years.

While older Americans may well cheer such an increase from a personal standpoint, it should also serve as a reminder to elected officials and Americans of all ages that Social Security -- along with Medicare -- is on an unsustainable path of rising costs and increasing reliance on general federal revenue.

Excessive inflation could increase the challenges of entitlement reform, particularly for Medicare because some drugs and other medical costs are already rising rapidly.

In their annual report four months ago, the Social Security and Medicare trustees reiterated the need for responsible reforms to both programs.

With an aging population and rising health care costs, the federal government must spend more each year just to provide the same level of Medicare and Social Security benefits to a larger group of beneficiaries.

In addition, however, many economists say the formula for Social Security’s cost-of-living increases is flawed and overstates the impact of inflation on beneficiaries.  This means they receive higher benefit increases than are actually warranted by inflation.

A reasonable reform would be for the government to switch to a more accurate measure of inflation for all of its programs, including Social Security. This index, known as “chained CPI” and once suggested by then-President Obama, accounts for changes in consumer behavior in response to changing prices on similar goods.

In addition, a broad effort to put Social Security on a sustainable course should include a careful review of every aspect of the program, including benefit increases for higher-income Americans.

The maximum amount of earnings subject to the Social Security payroll tax should also be on the table for discussion. The Social Security Administration says that maximum will rise next year to $132,900, up from $128,400. This cap means many higher-income workers pay lower percentages of their total earnings than lower-income workers do.

Unfortunately, there has been little political interest in recent years in serious discussions of how to meet the difficult challenges facing the big entitlement programs.  

Robert L. Bixby, executive director of The Concord Coalition, recently noted that while annual appropriations legislation receives ample attention in Washington, the public hears far less about automatic spending increases in “mandatory” spending, which includes Social Security and Medicare.

Yet this spending, together with interest on the federal debt, accounts for most of the federal budget. Absent reforms, the entitlement programs and rising interest payments will increasingly squeeze other important government programs.