The Really Bad Math Behind the Social Security Cuts

Among the sacrifices Congressional representatives placed on the altar of deficit negotiations is an “inflation adjustment” that will shave “only” a few hundred dollars from an average, newly retired Social Security beneficiary’s income each year. But the cruel hoax is that the reduction will amount to as much as $1600 when the beneficiary is older, poorer, and sicker.  Many seniors already have a tough time paying for food, rent, and medical care.

Even worse,  reductions in beneficiaries’ incomes may well cost government more for potentially preventable hospital and long-term care.  Senator Elizabeth Warren and other New England lawmakers should be lauded for splitting from Democratic representatives and the Administration regarding this ill-conceived proposal.

Many senior citizens are already vulnerable to economic hardship.  A recent US Census analysis that counts rising medical expenses found that over 1 in 6 elderly people live in poverty, unable to meet basic living expenses, and almost 20% more are living just above the poverty line. Social Security is the only or largest source of income for about 70% of seniors; the average monthly check is only about $1200.

The typical retirement savings of seniors is a paltry $50,000 — barely enough to get through several years’ living expenses, let alone 20-30 years of retirement.  This is not the result of cavalier actions by the older generation; these are the Americans whose home values have plummeted, whose defined-benefit pension plans have been decimated or disappeared, and whose retirement accounts were eviscerated by the Wall Street meltdown of the last decade. Yet the current proposal punishes these Americans as if they were at fault for their poverty.

Fidelity Investments has estimated that the average retired couple will need more than $200,000 to pay their out-of-pocket medical expenses during retirement, and that figure is probably conservative.

The arithmetic of Social Security benefit reductions just doesn’t fit with this reality.

What are the consequences of having to rely on Social Security alone?  High out-of-pocket health care costs can be “catastrophic” because they cause people to go without essential medical care. Our studies published in the New England Journal of Medicine show that a 50% reduction in drug benefits in New Hampshire for low income, chronically ill seniors backfired.

The NH policy reduced the use of essential medicines (e.g., for diabetes and heart disease), worsened chronic illness, increased acute care, and doubled the rate of permanent institutionalization in expensive nursing homes. These increased admissions raised government costs several times more than the drug “savings,” not even counting increased pain and suffering of patients and their families.

Dr. Nicole Lurie, the current US Assistant Secretary for Preparedness and Response, showed that about 15% of people (many seniors) who are admitted to hospital emergency departments experience significant hunger before admission.  Frequently, seniors skimp on medicines to pay for food, and this leads to illness and further hospital care.

Similarly, our studies show that almost 30% of disabled Medicare recipients in poor health skip or split pills to make them last longer because they can’t afford their prescription drugs, even in the era of the Part D drug benefit. One study indicates that splitting pills increases hospitalization of heart disease patients by 21%.

The current debate in Washington encapsulates the growing political and ideological divide as to how the costs of deficit reduction should be allocated across various parts of the population.  No single proposal more starkly embodies that issue than efforts to trim and chip away from recipients of an earned, contributory entitlement at precisely that time in their lives when they can least afford reduced incomes, and have the least capacity to compensate for them.

As a result, governments at all levels will be left mitigating the harm those income reductions produce.  Reducing the Social Security cost-of-living adjustment, in other words, is not only morally unacceptable, but substantively counterproductive.

Stephen Soumerai, ScD is Professor of Population Medicine and Director of the Drug Policy Research Group at Harvard Medical School and Harvard Pilgrim Health Care Institute.

22 replies »

  1. One good thing about this article is its meaningful essence that has awaken silence over those voiceless individuals that their voices be heard regarding their issues and concerns individually. It’s an important thing that needs to be answered intelligently.

  2. In this case Barry I was not eagerly calling for more taxes. Rather I was making the point that some things do not happen without coercion.

    Taxes are one form of coercion, but forced savings and mandatory pensions are another form also.

    And perhaps a more efficient form.

    My point is that pure freedom and long life spans may not go together.
    Freedom means that some persons will make mistakes. Back in the 1920’s, people who outlived their money would just plain suffer. Social Security was introduced when this became nationally unbearable.

    My point may not be a greatly important one. I may be over-reacting to some of the conservatives who bring up Singapore as a great example of free market medicine. It is far far from a free market. Just different forms of coercion than we use.

  3. “I suspect it may be cheaper to coerce younger people to save, then compound interest is on your side.”

    Bob –

    The whole point of putting money aside by companies and employees in a defined benefit pension plan, 401-K or IRA is to use investment returns to pay for a significant percentage of retirement income. Social Security doesn’t do that though it would have if the surpluses generated for years were actually saved and invested rather than spent on other government programs and replaced in the so-called Trust Fund with IOU’s. The only way to redeem the IOU’s and to get command of the economic resources needed to pay benefits to retirees is to sell real Treasury bills, notes, and bonds to public investors both domestic and foreign.

    In addition to very gradually raising the retirement age, the Greenspan Commission reforms raised social security taxes several times in the 1980’s and early 1990’s. The theory, if I remember correctly, is that the higher taxes would generate social security surpluses that would be sufficient or nearly so to finance the retirement of the baby boomers assuming they were actually saved and invested which, of course, they weren’t.

    I’m struck by how many times you call for higher taxes to solve various social problems especially those related to healthcare and social security. I wonder just what percentage of income you think middle class, upper middle class and wealthy people should be expected to pay in combined federal, state and local taxes to finance the safety net you would like to see provided plus everything else we expect government to do from defense and law enforcement to education to maintaining the national parks.

    In most years since 1972, my total tax burden ranged from 35%-40% of gross income (federal + state + local taxes) which I think is a fair share. That doesn’t even include the employer’s share of FICA taxes which most economists will tell you that employees actually pay in the form of lower wages than they would otherwise be paid or corporate income and property taxes which are largely built into the price of the goods and services we all buy.

    One point that I agree with you completely on is that most Americans today have lifestyle expectations well beyond what many of them can finance. What passed for middle class life when I was growing up would be viewed as poverty by much of the population today particularly with respect to the size of homes and amenities within them.

  4. America has chosen (more or less) not to require younger people to save, and not to require corporations to sponsor pension plans.

    Other nations do this a lot, but America seems to find this ‘paternalistic’ and an infringement on the freedom of young people to consume, or the freedom of corporations to seek out cheap non union labor.

    The current status of senior citizens ( which is likely to worsen) is the direct result of the freedoms described above.

    The only way out is higher taxes to generate more money for the elderly poor.

    So we are back to government coercion. I suspect it may be cheaper to coerce younger people to save, then compound interest is on your side.

    I think that paternalism may make a comeback in terms of social policy. Freedom is great, but it may be a bad fit when life expectancies are so high.

  5. I agree strongly with the need to maintain fair increases in the social security cost of living adjustments. I thought it might be useful to summarize my take-away points from your op-ed:

    1. Cutting social security will reduce economic access to medications and preventive medical care; this will actually increases overall costs as patients present with serious illnesses requiring hospitalization.
    2. For older SS recipients, the reduction in payments will actually be $1,600/year which they CANNOT afford.
    3. Medical care inflation (while improved) still exceeds any inflation index, so cutting SS and Medicare benefits is even worse.
    4. The proposal to cut SS and medicare costs is not financially and clinically rational.

  6. Hi Barry: Good points. There are clearly some “what ifs” that may help some folks avoid the worst effects of social security cuts. But there are millions more who are in poverty and are suffering right now. An editor at THCB showed me some data indicating that we were near the bottom of almost two dozen industrialized countries in terms of income security for our seniors.

    It is true that some elderly are well-to-do. But these are not the vulnerable people I was writing about. Paul had it right that a typical $50K savings will not last long. Those with dual Medicare/Medicaid coverage might be partially protected from medical care costs.. But not completely. Consider a dual enrollee I know who has to “spend down” from less than $12,000 to about $9000 before he qualifies for Medicaid. He would rather drop Medicaid coverage. Plenty of research shows that the sum of many small copayments is unaffordable to many dual enrollees. It simply isn’t the case that dual status protects many people from the deleterious effects of copayments on access to essential drugs and other preventive treatments. Moreover, many clinicians don’t accept Medicaid patients. Our research shows this proportion is as high as 50% in mental health specialties. A current study shows that cost containment policies in Medicare Part D reduces access to life-saving drugs, even among duals (e.g. prior authorization).

    And a person earning $12,000 per year is going to have a hard time paying even for subsidized housing in most ares of the country. There is plenty of research that constructs housing, food, transportation, clothing and medical care budgets for such folks and I am amazed that anyone can live on it. I bet you and I couldn’t. (Well it would be a problem for me.)

    I agree that the wealthiest seniors might be able to pay more taxes on social security but I would like to hear from others about such policies. I continue to be amazed by the law of unintended consequences that may thwart the savings and hurt the vulnerable.
    Best, S.

  7. Steve –

    I think it’s important to note that many of the lowest income seniors have other resources available to them. They may be eligible for both Medicare and Medicaid. They may be living with adult children and thus have no housing costs or they may be in government subsidized housing or apartments covered by rent control regulations. They are most likely eligible for food stamps as well. The poverty statistics don’t take the value of these in kind programs into account which makes the numbers suspect.

    I’m not saying there aren’t a lot of people both old and young who are struggling but the poverty numbers are probably overstated. I do think the Social Security program needs some modest adjustments. My two favorites would be to tax 85% of benefits regardless of income. The personal exemption combined with the standard deduction would still likely ensure that the lowest income elderly would owe no federal income tax. The second it to raise the wage base to which the FICA tax applies to $150-$175K to get it back to the point where 90% of all wages are subject to the tax which was the case back in the late 1980’s. The retirement age was raised to 67 under the 1983 Greenspan Commission reforms but it won’t reach that point until 2027 or 44 years after the legislation passed. I don’t think it needs to be raised further, at least at this time.

  8. Thanks for these excellent posts! Agreed that Medicare is the elephant in the room, especially given the impending costs of baby boomers like me. While medical care inflation has subsided somewhat it still eviscerates any tiny increases in the current COLA: 1.5% for December 2013.

    I agree that some retirees can make it on social security alone in other parts of the country. But a large proportion of the older generation is in poverty, depending solely on a measly $12K in social security income. Where can you live on that?

    As many of you have commented this program is one of the worst places to cut in such an unthinking way (“Chained CPI” sounds so authoritative doesn’t it? But, yes, the math doesn’t add up in real life.) . It will not save costs in the long run, will increase medical expenditures for untreated illness and force elders to reverse the gains they made (eg, skipping pills to save costs) since the advent of Medicare Part D.( See our and other research in JAMA several years ago)

    We should hold our legislators responsible for cutting true waste in government. It is abundant as you have stated. We don’t have to sacrifice poor elders. Best and thanks again for the great comments.

    This proposal will be acted on by the budget committee this week. Let’s talk about the economic realities to our legislators. S

  9. I think it is too broad a statement to state that folks could live on social security alone because the amount of the benefit varies so much depending on the person’s earning history. Sure people can sell their homes and capture some of their equity to use for expenses during retirement. However, the housing market is depressed in most areas of the country, so that even if they are able to sell their homes, the equity that was expected has been cut drastically. Thankfully, most folks at retirement age have owned their homes long enough not to be “under water”j, but, that said, I am sure some have that dilemma, too. Also, I read a report recently that the average retiree has only $51K in saving when they retire. With the economy in doldrums for almost a decade and unemployment fairly high, many folks are spending their “nest eggs” for basics, so that, if they even can retire, they will have insufficient funds to live at all, let alone in their accustomed lifestyle. Thus, a real crisis is on the horizon. Yes, Medicare is a bigger problem, especially with 10,000 people joining daily, and Democratcare planning to abscond with 3/4 trillion over 10 years from Medicare. Again, the Federal Government has promised more than it can possibly deliver.

  10. Wherever one stands on the SS issue what first must happen is fixing a very large problem with the program. Namely, by law, all excess SS proceeds must be invested into govt. bonds. The end result is the money gets spent. SS currently has a $2.5 trillion surplus, but again the money has been spent so the govt. now has a massive IOU.

    The same thing has occurred with military and federal civilian pensions. All such debt amounts to roughly $4.5 trillion dollars, which is called intra-governmental holdings.

    I think one could invest some of the proceeds into very stable stocks that perhaps pay dividends to increase returns. In fact this is what most pension funds do like CalPERS.

    Even if one just wanted to keep the money in government bonds then it would be better to hold the money at places like Fidelity and other and audit it very carefully. This way the $2.5 trillion surplus would still exist.

    SS is not unfunded on paper; however, the perennial theft of it does make it unfunded.

    On a side note, SCOTUS ruled in 1960 (Fleming vs. Nestor) that no one has a right to SS as if it were an annuity that people pay into and therefore rightly expect payout. Legally speaking no one is entitled to SS, which is nonsense.

  11. Cutting Medicare and Social Security are not goals, they are tactics. The goal is the privatization of both. Wall Street is salivating at the thought of having control of those trillions of dollars.

  12. It’s important to note that for reasonably healthy older people who own their home outright and who no longer have young children to support and educate or job related expenses, they can live a middle class lifestyle on far less income than young families with a mortgage, children to feed and educate and commutation costs. There have been articles recently about any number of small and mid-size cities where people can live reasonably comfortably on Social Security alone.

    To cite one small example, a neighbor of mine is in the process of selling here home here in NJ. It will probably sell for $300,000-$325,000 for a tract house with about 1,600 square feet. She and her husband plan to retire to FL where they can buy a comparable home for about $200,000. Moreover, the property taxes on the FL home will be $2,400 per year vs. a bit over $8,000 in NJ. The sum of homeowner association fees of $200 per month plus property taxes of the same amount bring basic housing costs in FL to $400 per month. Combined Social Security payments for the couple are probably about $3,000 per month. Savings are very modest and there are no job related pensions. The economics may not work well in the wealthy suburbs around NYC, SF, LA and Boston but they work pretty well in much of FL and lots of other places.

    That all said, I agree that Medicare is the bigger problem but that appears on the way to resolution as Medicare program costs came in lower than expected for the fourth year in a row. The Part B premium for 2014 will be $104.90 per month, no change from 2013 which implies that per capita costs were flat in 2013 vs. 2012. As the economist Herbert Stein told us, “If a trend can’t continue, it will stop.”

  13. “They need to stop taking that money if they’re not going to give it back. Seniors and veterans are hurting bad already.”

  14. Did I miss something? The math is bad. Stephen is spot on. We are expecting to be short what, $8T? on Social Security versus $50T in underfunding on current Medicare liabilities? Most of these budget cut geniuses do not understand how inexorably tied these programs are to the health and well being of beneficiaries. Before we once again spin the roulette of unintended consequences, let’s keep our eyes on the orize– get Medicare fixed if we can focus on this third rail, we can find the desired $8T five times over. It starts with raising the Medicare eligibility age to 70, means testing for Medicare premiums and Social Security Benefits, ACO based Medicare delivery, case, population health and bundled based reimbursement, quality incentives, and a sober look at the fact that focusing on unit cost reduction and creating barriers to care through income reduction will lead to more expensive episodes of care. The average retiree lives on $21,000 a year. Those that read and write on these blogs as well as those who are looking for things to toss out of the budget are not likely to be impacted. It’s time to refocus. My guess is well not pay downthe debt or even balance the budget. We will end up inflating our way out of the debt crisis. Too bad seniors don”t have money to invest. I’d be telling them to short the 10 year treasury today.

  15. “take ss and medicare and veteran’s benefits out of the budget negotiations…..!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!”

  16. The Medicare Part B increase for 2014 is ZERO. The monthly premium will remain $104.90 which is 9.1% lower than the 2011 cost of $115.40 per month.

  17. Social security needs to be pegged to the real inflation, which is not even the figure produced by the government yearly. That number needs to include the extra cost of health care, fuel and food, at the very least. When Medicare Part B increases more than the allotted increase, the real buying power decreases. It is morally corrupt to even make it worse! Attacking entitlements is needed, perhaps by increasing the retirement age gradually up to age 70 for those age 50 and under
    and linking Medicare to that age.

  18. No to Social Security cuts. More efforts to destroy the middle class the engine that makes the economy go!