A guide to the next debate on entitlement cuts

CHICAGO Tue Oct 15, 2013 4:56pm EDT

Related Topics

CHICAGO (Reuters) - Talk about counter-programming: A coalition of Social Security advocates plans a one-day summit meeting later this month to talk about ways to expand Social Security benefits to address America's retirement security crisis. Unfortunately, it looks like Washington will be changing the channel.

If we do manage to sidestep the shutdown-Obamacare-debt ceiling-default crisis this week with our economic system intact, it looks like Congress and the White House will enter a new round of negotiations to cut Social Security - and Medicare.

I don't need a crystal ball to make this forecast. Entitlement cuts are on the agenda not only for Republicans, but for the White House, which included cuts to Social Security and Medicare in its budget for the fiscal year that was supposed to start October 1st. So, the dialog in Washington will keep moving in the wrong direction: taking money out of the pockets of older Americans at a time when Social Security benefits already were cut by 1983 legislation, pensions are vanishing and many approaching retirement haven't saved enough.

Still, you'll need a scorecard to follow the entitlement cutbacks that will be up for discussion during the next phase of budget wars, and what they will mean for the pocketbooks of older Americans. Your columnist unhappily obliges.

LESS COLA

President Obama wants to reduce Social Security's annual inflation adjustment. Currently, the cost-of-living adjustment (COLA) is tied to the Consumer Price Index for Urban Wage Earners and Clerical Workers, known as the CPI-W. The index measures the cost of a general market basket of goods and services. But the president's budget called for adoption of the "chained CPI," which takes into account changes in consumer buying behavior when prices rise - namely, that they substitute cheaper goods. Advocates of the chained CPI often describe it as a minor technical fix aimed at making COLAs more accurate, but it would be a real cut in benefits.

"It's a backdoor way to use arcane economic theory to cut benefits," says Stephen Adams, president of the American Institute for Economic Research (AIER).

The Social Security Administration estimates the chained CPI measure would reduce COLAs by three-tenths of a percent annually. The real pain would be felt in the out years of a chained CPI, because the cuts are cumulative -- each year's COLA would be calculated off a lower benefit amount as the years roll on.

Budget impact: $127 billion in lower benefits over ten years, the Congressional Budget Office (CBO) says.

MORE MEANS-TESTING

Wealthy seniors already pay more for Medicare - a lot more. High-income surcharges are levied for on premiums for Part B (outpatient services) and Part D (prescription drugs). The surcharges currently start for individuals with $85,000 or more in ordinary income, and joint filers making $170,000 or more. Anyone above those numbers pays $42 per month for Part B this year in addition to the basic premium of $104.09. The surcharges move up in bands from there; if you're lucky enough to have ordinary income greater than $214,000 this year, your monthly Part B surcharge is $230.80.

The President, House of Representatives and some centrist policy experts have proposed expanding the surcharges - either by lowering the income threshold or by raising the premiums. The Kaiser Family Foundation (KFF) found that the Obama plan would affect individuals with incomes equivalent to $47,000 for an individual and $94,000 for a couple.

KFF reports that the surcharges currently hit just five percent of seniors - after all, relatively few retirees have that kind of ordinary income, since they're retired. But if older Americans work longer - as they're often told they must do - far more will have higher ordinary income while on Medicare.

Budget impact: $50 billion in new revenues over 10 years, according to the President's budget.

MORE COST-SHARING

Higher costs won't be limited to affluent seniors. A variety of plans would hit the vast middle of Medicare beneficiaries, although most are packaged as benefit simplification and redesign.

For example, a nonpartisan commission that advises Congress on Medicare has recommended a package of changes related to Medigap supplemental insurance policies. These plans plug gaps in basic Medicare by covering copayments, coinsurance, and deductibles. Medigap is very popular with seniors because it reduces the risk of unpredictable spending - for a fixed premium, those variable out-of-pocket costs are covered.

But some policy experts think that Medigap policies that cover all (or almost all) out-of-pocket costs encourages them to use more healthcare, driving up overall Medicare costs.

The Medicare Payment and Advisory Commission (Medpac) proposed a 20 percent tax on Medigap premiums paid by seniors who buy the low-deductible supplemental plans. In the Medpac plan, that would be coupled with a simplified deductible structure and a major sweetener: a $5,000 cap on out-of-pocket catastrophic expenses. While the changes would save money for beneficiaries who become seriously ill, Medicare consumer advocates argue these changes would drive up costs for most seniors.

Budget impact: limiting Medigap deductible coverage could save $2.5 billion over 10 years, according to CBO.

These reform ideas have fairly broad support across the right and center of politics in Washington. It's far from clear that Congressional Democrats will go along, and advocacy groups can be expected to put up a good fight. But with our current winner-take-all political climate, older Americans should be getting ready to tighten their belts.

(Follow us @ReutersMoney or here. Editing by Linda Stern and Andrew Hay)

FILED UNDER: