State of the Union and Retirement

Retirement programs drew a few mentions in President Barack Obama’s State of the Union address on Feb. 12, including these two about Medicare reform:

  • “Those of us who care deeply about programs like Medicare must embrace the need for modest reforms; otherwise, our retirement programs will crowd out the investments we need for our children and jeopardize the promise of a secure retirement for future generations.”
  • “I am open to additional reforms from both parties, so long as they don't violate the guarantee of a secure retirement.”

While the president didn't specifically mention Social Security reform, a change that might prove palatable to both him and Congress calls for using a new measure of inflation — dubbed the “chained” Consumer Price Index (CPI) — to calculate the cost-of-living adjustment (COLA) for Social Security benefits. In fact, President Obama included this Republican-backed idea in his offer late in the fiscal-cliff negotiations last year, but it wasn't adopted in the final deal.

A chained CPI assumes that consumers react to rising prices by buying similar goods that are cheaper. As a result, inflation would grow about 0.3 percentage points less per year than under the current inflation measure. Adopting a chained CPI would therefore cut Social Security benefits by providing a lower COLA adjustment.

While a move to chained CPI would represent only a small hit to benefits in the short term, the effect of the benefit cut would grow as COLAs add up over time. To cushion this reduction, some middle-ground proposals have suggested a benefit increase for people who have received benefits for 15 or 20 years.

Other possible Social Security reforms include increasing the retirement age or hiking the amount of wage income subject to Social Security taxes. While the political debate may grow heated, the program needs some type of adjustment to improve its finances over time, as noted by the Social Security trustees in their recent annual reports.

Any opinions expressed are solely the opinions of Jon Vogler and do not necessarily reflect the opinions of Invesco Distributors, Inc. or any of its affiliates. This information is not intended as tax advice. Please consult a tax advisor regarding individual situations.

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