South By North Strategies, Ltd.

A new paper from the Center for Economic and Policy Research analyzes the impact that changes to the cost of living adjustments used within the Social Security program would have on the living standards of older Americans.  From the report …

Proposals to reduce the annual cost of living adjustment for Social Security by changing the indexation formula are likely to lower the living standards of retirees. The effect of this reduction would be to lower the real value of benefits by approximately 3 percent after workers have been collecting benefits for 10 years, 6 percent after 20 years, and 9 percent after 30 years. The evidence from the reduction in benefits that resulted from changes in the consumer price index in the 1990s indicates that retirees did not change their work or saving behavior to offset this reduction in benefits. The Social Security share of retirement income actually rose for most groups, even though the size of the benefit was smaller relative to the lifetime earnings.
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It is also important to recognize that benefits, relative to lifetime earnings, have already been cut for those retiring this year or in the near future. This is due in part to changes in the consumer price index that already cause it to show a rate of inflation that is at least 0.5 percentage points annually lower relative to the true rate of inflation than the consumer price index that was in place in the 1980s. The phase-in of the increase in the age of receiving normal benefits from 65 to 67 also reduces benefits. In addition, this group of near retirees has paid a considerably higher share of their wage income as Social Security taxes.