I don’t often delve into politics. We promised you financial information, and I aim to provide just that. Unfortunately, they intersect, often with disastrous results.
There is something pressing that absolutely needs to be addressed right now in this election, both by voters and politicians alike, and it isn’t coming up at all.
The Social Security Disability Insurance program will be depleted within a few years. Social Security will be tapped out in the mid-2030s.
That means one thing: The government will soon raise taxes — and is definitely going to hand you a hefty income cut.
The establishment politicians are aligning behind it in both parties, with Obama only withdrawing his proposal a couple years ago after widespread condemnation, and House leader Paul Ryan supporting it as well.
Change is needed to the system, and the preferred solution from them is to pull thousands more from us through income taxes, the standard deduction, contribution limits for 401(k)s, and eventually Social Security while you are retired.
We’re talking about C-CPI-U, or the “chained consumer price index — urban.” The changes are seemingly minute. On paper, we’re just going to have an even exchange between obscure equations that are basically the same.
But that’s the whole point: If the general public can’t understand it, they don’t pay attention to it. If they don’t pay attention to it, they won’t punish politicians for it.
Keep in mind… this wouldn’t have surfaced if it didn’t result in large cuts to benefits over time. The whole point is for you to get less of what you put in.
In other words, you’re going to be responsible for a much larger portion of your retirement funds going forward, and it is going to start during the next president’s term.
The Devil Is in the Details
This situation warrants some explanation of where we are now and where this will take us.
Virtually everything involving taxes and government benefits is currently pegged to CPI-W, the consumer price index for urban wage earners. Another inflation measure, CPI-U, is used for a number of government programs, which is the consumer price index for everyone in urban areas.
CPI-U and CPI-W differ very slightly in the weighting and selection of goods and services they track. Chained CPI attempts to bring “substitution effects” into the equation. For example, when times get tough, people will skip a thick steak and settle for chicken at the grocery store.
Only economists and finance nerds have had strongly-held views on the merits of CPI-U and CPI-W up until recently.
However, chained CPI merits your attention. Because if and when it is applied to Social Security, it will result in cuts that will multiply over years and dramatically reduce your benefits.
Imagine a 65-year-old individual who retired in 2000. This person started with an average initial monthly benefit of $1,435, or $17,220 a year. Under the current CPI-W formula, that person would now receive up to $1,986 a month, or $23,832 a year.
But if Social Security was using the chained CPI back in 2000, the sum would be around $1,880 a month, or $22,560 a year.
The seemingly inconsequential smaller increases from year to year result in a 5% cut between these scenarios. And that number snowballs into massive losses over time.
This is bad news, especially considering the vast number of elderly who are completely dependent on Social Security to keep a roof over their heads and a meal in their stomachs.
Of course, the government could use CPI-E, which is an inflation rate calculated for the elderly. The Bureau of Labor Statistics tracks it, but it is not used in any official capacity — even though it is far more accurate than any of the other options for Social Security recipients.
Why? It would effectively raise Social Security benefits over time.
It’s important to realize the people aren’t the issue. It’s all about the numbers.
But Wait, There’s More!
Unfortunately, we’re not done with the bad news…
The Tax Policy Center did the math on the income tax increases that would be caused by a switch to chained CPI and concluded chained CPI would raise revenue through the many parts of the tax code that are adjusted for inflation every year. That includes income tax brackets, the standard deduction, and contribution limits to 401(k)s.
Americans will see more of their income move quickly into higher tax brackets. Adjustments for inflation will be slower, moving many into higher brackets as their wages increase faster than the government’s measurements of inflation.
As you can imagine, the standard deduction will grow slower as well, and retirement account limits will proportionally fall behind current caps…
By 2020 the use of chained CPI could mean an average tax increase of $311 among the nearly 81% of households that would see a tax increase. The White House estimated a switch to chained CPI will raise $230 billion over 10 years.
A proposal to protect the most vulnerable Social Security recipients has been submitted in the past in conjunction with chained CPI, but it would drastically undermine the point of all this; reducing how much of our money the government can keep from us.
The average annual Social Security benefit was $16,020 in 2015, and just under 40% of retirees rely on Social Security for 90% of their income. That’s a hefty number of people to exclude.
If this idea sticks as the linchpin of reforms, there will be a concerted effort to apply it to as many people as possible to boost savings. Without excluding the most vulnerable people, this seemingly innocuous change will result in a $100 billion spending reduction over 10 years — and $60 billion in new tax revenue.
You Need to Do Something
To put it as succinctly as possible: You need to do something about this. And soon.
Ultimately, there is no stopping the cuts coming to Social Security — or the gradual increase in taxes you will be forced to pay.
After decades of overspending and putting the tab on future generations, we’re pretty much out of money and completely out of time. The window for a small, relatively painless adjustment is decades-past.
That is why this method of reform has broad bipartisan support. It’s just a sneaky way of cutting benefits by about 5% per decade and adding .2% to your income tax. Politicians just don’t want to admit to us what they want to do to us.
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