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What the Next Fiscal Showdown Has to Do with Health Care

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The New Year's Day deal between the White House and Republicans postponed the long-awaited debate over cutting Social Security and Medicare. But in the next few weeks, Beltway talk will again turn to slicing these interrelated social insurance programs. Changes to Social Security payments could well affect how much money seniors now and in the future will have to pay for health care.

Some Washington insiders are betting that negotiators, who will have to address spending cuts and lifting the federal debt ceiling, will approve something called the Chained Consumer Price Index (CPI), an alternative way to calculate Social Security's cost-of-living adjustments, usually referred to as COLAs. In the early 1970s, Congress enacted a yearly COLA for Social Security benefits to help keep pace with inflation. In the last few years, inflation has been low so seniors have gotten very small increases and sometimes none.

The proposed change would mean that people will get smaller benefits over time.

So why is it on the table? CPI cuts spending and raises revenue, both goals of deficit reduction. The Congressional Budget Office estimates that the Chained CPI could produce some $217 billion in savings over 10 years with an estimated $145 billion coming from benefit cuts to Social Security and others who receive government pensions. When the Chained CPI is applied to the tax code and affects tax brackets and other programs, it could bring in some $72 billion in revenue.

'The current cost-of-living adjustment under-measures the inflation experienced by Social Security recipients,' warns Nancy Altman, co-director of the advocacy group Strengthen Social Security. It does that by increasing benefits 0.3 percentage points less, on average, each year than the current COLA formula. The slower increase in benefits adds up each year so as a person gets older, the effect is greater. Altman's group has calculated that a person age 75 in the future would get a yearly benefit that's $653 lower after ten years of the Chained CPI than he or she would get under the current formula. An 85-year-old would get $1,139 less to live on.

Supporters of the Chained CPI, however, argue that it is a better measure because it allows for the way people substitute cheaper goods and services when prices rise. There's just one problem with that argument. It doesn't account very well for health care spending, the largest expense for many seniors. If you need a liver transplant, you can't substitute a hernia operation like you might substitute chicken for steak.

Lower benefits based on the Chained CPI'especially in very old age when other financial resources are gone'will make it harder to pay for health care. Fidelity Investments estimates that a 65-year-old couple retiring today will need $240,000 for future medical expenses, and that does not include long-term care. The AARP Bulletin calculated that seniors on Medicare today, which covers most costs, are still'  paying around $3100 a year out of pocket just for deductibles and premiums.

Those numbers are likely to go up, not down, and that's why the proposed Chained CPI formula could really pinch. To a well-paid 40-year-old, a benefit that's $653 less a year may not sound like a lot. But considering that half of all Medicare beneficiaries live on $22,000 or less and have less than $53,000 in savings, that amount can be a king's ransom. It could mean the difference between going to a doctor and letting a health condition get worse.

More Blog Posts by Trudy Lieberman

author bio

Trudy Lieberman, a journalist for more than 40 years, is an adjunct associate professor of public health at Hunter College in New York City. She had a long career at Consumer Reports specializing in insurance, health care, health care financing and long-term care. She is a longtime contributor to the Columbia Journalism Review and blogs for its website, CJR.org, about media coverage of health care, Social Security and retirement. As a William Ziff Fellow at the Center for Advancing Health, she contributes regularly to the Prepared Patient Blog. Follow her on twitter @Trudy_Lieberman.


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Health Care Cost   Pay for your Health Care   Trudy Lieberman  


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